RAGHURAM G. RAJANCOMBATTING

INDIAN ECONOMY

Group:Fredrick

ParasBidhanRahul

Submitted to :Achala Dhadichi

INTRODUCTION BACKGROUND• Raghuram Govind Rajan (born 3 February 1963) is the current and the 23rd Governor of the Reserve Bank of India, having

taken charge of India's central banking institution on 4 September 2013, and succeeding Duvvuri Subbarao.

• Dr. Rajan was chief economic adviser to India's Ministry of Finance during the previous year.

• Youngest-ever Economic Counselor and Director of Research (chief economist) at the International Monetary Fund (Washington, D.C., United States) (October 2003 to December 2006)

• He was the President of the American Finance Association in 2011 and is a member of the American Academy of Arts and Sciences.

• In January 2003, the American Finance Association awarded Dr. Rajan the inaugural Fischer Black Prize for the best finance researcher under the age of 40. The other awards he has received include the global Indian of the year award from NASSCOM in 2011, the Infosys prize for the Economic Sciences in 2012, and the Center for Financial Studies-Deutsche Bank Prize for Financial Economics in 2013.

• He won Director's Gold Medal in IIT Delhi and was a Gold medalist at IIM Ahmedabad. He received a Ph.D. in Management from the MIT Sloan School of Management in 1991 for his thesis titled "Essays on Banking“.

BACKGROUND AND PICTURE OF RAGHURAM RAJAN

The Five Pillars

• Monetary policy framework.• Reform India’s banking system.• Liberalizing Indian markets.• Financial inclusion.• Dealing with financial distress

India Economy Situation

• The currency has plunged nearly 20 percent since May as Asia's third-largest economy confronts its worst crisis since 1990-1991.

• The country has the world's third-largest current account deficit of about $90 billion, high inflation and an economy projected by private economists to grow at about 4 percent this fiscal year, half the rate it was in 2008.

IMPACT• It has tumbled about 10 percent alone since Rajan's appointment on August 6.

• Has cut interest rates twice in less than two months outside the policy dates.

• who famously predicted the 2008 global financial crisis, will take the helm of the Reserve Bank of India with a whisper or a bang. In other words, will he take his time or come out with fresh policy announcements like Bank of Japan Governor Haruhiko Kuroda, who launched a massive stimulus package within weeks of taking office earlier this year.

• Since November 2008, Rajan has been actively involved in Indian economy, playing a variety of important roles, including the honorary economic adviser to the Planning Commission, Chief Economic Adviser to the Ministry of Finance and now RBI Governor, for a period of three years.

Major Steps • Communication: I remember reading the first monetary policy of Mr Rajan and the emphasis were on the communication. He

said, and I quote"A central bank should never say “Never”! But the public should have a clear framework as to where we are going, and understand how our policy actions fit into that framework. Key to all this is communication, and I want to underscore communication with this statement on my first day in office".

• Earlier, RBI used to follow many indicators of gauging Inflation but Mr Rajan was very clear in his conference that from now on, CPI (consumer price inflation) will be the leading indicator to measure inflation rather than wholesale price inflation.

• Markets run on sentiments and sentiments do get a boost when there is a proper communication.

• Bold decisions: When there is policy review, almost all the business channels have a poll of the possible outcomes of the policy review. In the later half of 2013 and early 2014 review he surprised the markets in each policy and gave a rationale behind it. When the analyst predicted RBI will hold rates, it was raised and when they thought RBI will definitely hike rates, it was kept unchanged. One of the top reporters mentioned that it was only Raghuram Rajan, who could have done this. What I mean is that you put your credibility on the line when your opinion doesn't match with 90% analysts and experts but he did that in style.

• Not succumbing to pressure: There was a word in financial services that we may see a rate cut after the elections as it has always been the case in the past in India where governments try to influence the decisions made by RBI. Rates were cut unnecessary in 2012-2013 which was another reason for a market crash in August -sept apart from Fed tapering. This belief of the rate cut was further fueled by statements made by Mr Arun Jaitley prior to the election. But that was not the case with Mr Rajan. Rate cut which looked certain after the election has not yet happened and taming Inflation has remained as a priority. I am glad that RBI is working independently as well as there is no visible difference between the Government and RBI.

• Stable Rupee: The credit of stable currency (rupee) goes to RBI. The falling rupee topic is the popular one. Everybody knows rupee went down the hill. Here is the thing, Rupee could have appreciated to 55-57 levels after the elections, because of the sudden FII inflows, had the RBI decided not to intervene.

• The "hot money" or FII money is very opportunistic.

• The moment there is an interest rate hike in the US or any other investment opportunity, this money will be the first to move out which can bring volatility in exchange rates. It's a complex process. Even I don't understand it fully. What I do know, is that through open market operations, RBI by buying and selling dollars at appropriate times have been able to stabilize our currency and somewhat safeguard it from future volatility by building forex reserves.

Movements and Statements• The move to cut rates by 25 basis points, the second cut in two months

outside its normal meeting cycle, came despite concern in the bank's senior ranks that there is no clear picture on the state of the economy or on inflationary pressures.

• RBI Governor Raghuram Rajan said that the "excessively strong rupee" is undesirable as it triggers disinflationary pressures

• It's also uncertain whether a lower rate signal would weaken the rupee and boost export: a lower inflow into bonds could be more than offset by higher investment in equities by foreign portfolio managers.

Target

• In a 2014 interview, Rajan said his major targets as governor of the Reserve Bank of India were to lower inflation.

• Increase savings and deepen financial markets, of which he believed reducing inflation was the most important.

• A panel he appointed proposed an inflation target for India of 6% for January 2016 and 4% (+-2%) thereafter.

RAGHURAM RAJAN IN COMBATING INDIAN ECONOMY• Raghuram Rajan assumed office a year ago at a time of soaring inflation, receding growth prospects,

widening deficit on the current account and a veritable run on the rupee which was in free fall. A year since, inflation is under control, the economy is bouncing back, current account deficit has been whittled down to an insignificant statistic and the rupee has reversed trend to such an extent that it is the best performing emerging markets currency in the last one year.

• Admittedly, not all of it is the Rajan effect. The heavy lifting in terms of shoring up the rupee and reining in the current account deficit was done by his predecessor Dr. Subbarao but Dr. Rajan managed the fallout well and rolled out further nuanced policy measures such as the special foreign currency swap arrangement with banks for attracting deposits from NRIs.

• It would not be an overstatement to say that the background of Dr. Rajan — his formidable academic credentials, his initial sure-footed moves that were closely watched and his confident statements — went a long way in calming the nervous markets. So much so that when the markets began to reverse direction soon after, pundits were quick to term it the “Rajan rally.”

Battle against inflation• Combating currency speculators and steadying the rupee was just the immediate priority; there remained the

larger problem of quelling inflation and helping the Centre pursue its growth agenda.

• This is where Dr. Rajan surprised long-term Reserve Bank of India (RBI) watchers who, given his Chicago school moorings, did not expect him to adopt a conservative approach. Yet, that is exactly what he did — raising benchmark interest rates twice within the first two months and raising them yet again in January 2014. It must not have been easy for the RBI Governor, given that the government was in election mode, growth was slipping and the corporate sector was screaming from the rooftops for a reduction in rates.

• What’s more, he took the battle against inflation to the next level by targeting consumer price inflation rather than wholesale price inflation, which has traditionally been the benchmark for the RBI. This was one of the important recommendations of the Urjit Patel Committee that he constituted on his first day in office and a key reform measure that he accomplished within a few months of assuming office. The RBI may have tasted greater success in quelling inflation if only it had got adequate support from the Centre, as much of the price rise, especially in food commodities, was due to supply-side factors.

• Dr. Rajan also managed to make the process of handing out new bank licences transparent and controversy-free, though he is still far from redeeming his initial promise of licences on tap. The RBI Governor has also not been able to persuade foreign banks to open wholly owned subsidiaries in India, which is important from the regulatory point of view given the experience with the 2008 crisis. Despite the freedom to open more branches that comes with subsidiarisation, foreign banks have refused to take the RBI bait and this will be a work in progress for Dr. Rajan for the remainder of his term

Some limited success• The RBI Governor has also tasted only limited success in prodding banks to move away from their “lazy banking”

habits. The two cuts in statutory liquidity ratio aggregating to 1 percentage point have to be seen in this context.

• Dr. Rajan was clear in his view that banks should be more active in lending rather than simply parking their funds in government securities. That bank lending has not picked up in the last one year is something that the Governor must surely be conscious of.

• Dr. Rajan may also derive only limited satisfaction from his moves on reining in bad loans. He had signalled an aggressive intent in that speech on his first day when he said promoters do not have a divine right to stay in charge even when they mismanage.

• It has taken more than a year to see the first impact of that aggression — the first counter by United Bank of India (UBI) declared Vijay Mallaya and Kingfisher as “wilful defaulters.” The RBI’s resolve in pushing banks to clean up their balance sheets and haul up recalcitrant borrowers will be fully tested in the months ahead. As banks begin to crack the whip, there is bound to be political pressure from influential borrowers, some of whom also occupy public offices. Handling the fallout will be one of the most important tasks for Dr. Rajan in his second year in office.

• The RBI Governor also faced his first setback on reforming the central bank when his proposal to appoint a chief operating officer elicited opposition from within, including the unions. Though he moved quickly to control the situation, his moves on this front will be closely watched.

The Tricky Path ahead• As the growth impulse returns in the economy, the RBI will be faced with the renewed

threat of a bounce back in inflation. The RBI Governor has set a target of 8 per cent for consumer price inflation by January 2015 and 6 per cent by January 2016 and he will be tested to the full in meeting those targets.

• With retail inflation close to the targeted level now and wholesale inflation also soft, pressure is already mounting on the RBI to take a re-look at interest rates. This is where the tricky part begins for Dr. Rajan — while he has to be conscious of his responsibility to keep prices in check, he also needs to ensure that his moves do not end up discouraging investment.

• The good news though is that he seems to have struck a good rapport with the powers in New Delhi. This is important, not just in the conduct of monetary policy, but also in the context of the recommendations of the Financial Sector Legislative Reforms Commission which, if implemented, will curb the role of the central bank. If Dr. Rajan’s good understanding with the Centre is sustained, we could well see more reforms from the RBI in the months ahead.

Dr. Rajan winning at fighting indias inflation

• Annualized Consumer Price Index (CPI) inflation rates have eased to five-year lows in India, falling to 5.5% in October down from over 11% a year ago (even prompting some to believe that a rate cut in India’s key lending rate is imminent).

• The decline in India’s high inflation rate comes after Rajan took office as the country’s central banker more than a year ago in September 2013 and began raising interest rates after five months into the job even as India’s economic growth was slowing.

• In a speech Rajan gave shortly after becoming India’s central banker, he remarked “the governorship of the central bank is not meant to win one votes or Facebook ‘likes’,… But to do the right thing, no matter what the criticism.” Now Rajan has results to show his efforts to scale back inflation, no matter how unpopular, have been effective.

Annual change in indias CPI{consumer price index}

Images of Raghuram G. Rajan