Saturday, September 7, 2013

Raghuram Rajan - The new RBI Governor

Outgoing Governor D.Subbarao welcomes successor
Raghuram Rajan 

Raghuram Rajan, 50, took charge as the Reserve Bank of India (RBI) Governor from Duvvuri Subbarao on 4th September 2013. He is the 23rd Governor of the RBI and has been appointed for a period of three years.

Mr. Raghuram Rajan earned his bachelor’s degree in electrical engineering from IIT-Delhi, before pursuing his MBA in 1987 from the Indian Institute of Management, Ahmedabad, followed by a PhD in 1991 from Massachusetts Institute of Technology. He was a gold medalist at both IIT and IIM. Mr. Rajan’s claim to fame is his prediction of the 2008 global financial crisis in his paper titled ‘Has Financial Development Made the World Riskier?’ He had previously served as a Chief Economist to the IMF from 2003 to 2007, and more recently as the Chief Economic Advisor to the Finance Ministry of India for the past one year.

A few critics were concerned with his appointment as the RBI Governor, since he has never held a decision making post. His previous posts at the Government of India and the IMF were purely advisory roles. However, these concerns have been put to rest as Mr. Rajan brilliantly began his innings at the RBI spelling out plans to reform the country’s banking industry and reshape its financial infrastructure.

A few key decisions that he took are as follows:
·         Limits for exporters to re-book cancelled forward exchange contracts doubled to 50% of valued contracts; for importers it has been increased to 25% from 0%
·         Special concessional window for swapping foreign currency non-resident (FCNR) deposits and dollar funds
·         Overseas borrowing limit for banks hiked from 50% to 100%
·         A committee led by former RBI Governor Bimal Jalan has been formed for looking in to the new banking license applications
·         A committee led by Nachiket Mor formed to study every aspect of financial inclusion
·         Inflation indexed savings certificates linked to CPI to be launched by November end

The markets have responded spectacularly. The BSE Sensex has gained almost 675 points in the last two days to settle at 19270 (as on 6th September 2013) since Mr. Rajan has taken charge. The rupee too has gained almost 1.5 rupees settling at 65.24/dollar (as on 6th September 2013).

All eyes are now on the monetary policy that will be announced on 20thSeptember 2013. It was earlier scheduled for 18th September. Although no specific reason was mentioned, it is understood that the RBI will take into consideration the decisions taken by the US Federal Reserve in their monetary policy to be announced on 18th September.

Mr . Rajan, as he has himself admitted, has no magic wand. However, with his maiden speech, he has instilled a lot of confidence in the market. His bold entry to the job, announcing a raft of financial deregulatory measures has received rave reviews from economists and the local media. To conclude, I quote the outgoing Governor, D. Subbarao, on Mr. Raghuram Rajan - “The country could not have asked for more capable person to lead RBI in most difficult times”.

- Sufiyan Sarguroh