Journey of an Engineer - To RBI Governor…!

Raghuram Govinda Rajan is an Indian economist who has been appointed as the next (23rd) Governor of the Reserve Bank of India on 6th of Aug, 2013 for a term of three years and will take over from Dr. D Subbarao, whose five year term completes on September 4, 2013.

He formerly served as the president of the American Finance Association and was the chief economist of the International Monetary Fund (IMF)

Rajan's previous work with the Indian government includes his helmsman ship of a Planning Commission-appointed committee on financial reforms, and as honorary economic adviser to Prime Minister Manmohan Singh.

After two governors from Andhra Pradesh, Y V Reddy and D Subbarao, it is the return of a Tamil Brahmin to the high profile post.

Raghuram G. Rajan was born in 1963 in Bhopal to an IFS officer from a Tamil family. He was abroad till his 7th year of school, having lived in Sri Lanka, Indonesia, and Belgium, and in 1974, he moved back to India from Belgium. Then he did the rest of his schooling in Delhi.

In 1985, he graduated from the Indian Institute of Technology, Delhi with a bachelor's degree in electrical engineering, and he completed the Post Graduate Diploma in Business Administration at the Indian Institute of Management Ahmedabad in 1987.

Rajan won the Director's Gold Medal for best all-round achievement at IIT Delhi and was also a gold medallist at IIM Ahmedabad. He received a PhD in management from the MIT in 1991 for his thesis titled "Essays on Banking"

After graduation, Rajan joined the Booth School of Business at the University of Chicago. He was then appointed as the youngest-ever Economic Counselor and Director of Research (chief economist) at the International Monetary Fund (IMF) from October 2003 to December 2006.

In 2003, he was also the inaugural recipient of the Fischer Black Prize awarded by the American Finance Association for contributions to the theory and practice of finance by an economist under age 4

Replacing Kaushik Basu Rajan was appointed as Chief Economic Advisor to the Ministry of Finance, Government of India on 10 August 2012. He also prepared his very first Economic Survey for India for the year 2012-13, on the 27 February. 

Raghuram Rajan’s younger brother, Mukund Rajan is the Group Spokesperson and Chief Ethics Officer of the Tata group.

Wealth of experience…!

In fact, Dr. Rajan is one among very few Indian economists who risked criticizing the U.S. financial system at the prime of his career and warned against the potential catastrophes. Having gained a wealth of experience and broad and analytic perspective on how systems work, he came up with controversial papers chaffing the finance sector. After an initial few brickbats, his views and implications on the flaws of the financial sector were later noticed when he managed to prove himself as right.

Appreciate this. On why stimulus has failed, Dr. Rajan, in one of his columns said: “Advanced countries will spend decades working off high public debt loads while their central banks will have to unwind bloated balance sheets and back off from promises of support that markets have come to rely on.’’

On the role of central banks, he said, in another write-up: “Quantitative easing has truly been a step in the dark. Given all the uncertainty, why have central bankers, for whom ‘innovative’ is actually an epithet, departed from their usual conservatism in adopting it?’

Back home, on why India slowed down, Dr. Rajan said: “To revive growth in the short run, India must improve supply, which means shifting from consumption to investment. It must do so by creating new, transparent institutions and processes, which would limit adverse political reaction.”

  

Key challenges for Raghuram Rajan…!

The immediate priority for the new governor will be to draft the mid-quarter review of Reserve Bank of India's monetary policy on September 18 - within a fortnight of taking charge. But the long-term challenges that Rajan has to address are:

1. North Block – Mint Road relationship...  

The relationship between the finance ministry and the Reserve Bank of India governor’s office has hit rock bottom.It will be a challenge for Rajan to improve the relationship at a time when the economic scenario is deteriorating.

2. Recovery of rupee...

Perhaps the biggest challenge for the new governor will be to strengthen the rupee which has depreciated more than 12 per cent in the current financial year, and the drivers of the weakness are not entirely in control of Indian policy makers.

3. Reversal of liquidity tightening measures…

If Subbarao decides to continue with the liquidity tightening measures till September 4, or perhaps introduces new measures, then Rajan has to face the challenge of withdrawing those measures.

That's because the timing of such a step will be critical for exchange rate stability.

4. New bank licences... 

Rajan takes charge at a time when the banking regulator is in the process of giving fresh licences for banks after more than a decade and for the first time decided to allow industrial houses. Rajan faces the challenge of selecting the ‘fit and proper’ candidates from the 26-odd applicants.

5. Recouping FX reserves... 
 The foreign exchange reserves is at a three- year low and could cover imports for about six and half months, lower than what is seen as providing stability to the currency.

Replenishing the forex kitty will be a key task.

6. Keeping inflation under check... 
After fighting price rises for close to three years, outgoing governor D Subbarao finally brought WPI inflation below 5 per cent – seen as the tolerance threshold of the central bank, though consumer price inflation is still high.

The best person…!

Welcoming his appointment, Dr. Rangarajan, a former RBI Governor himself, said: “Rajan will make an excellent Governor at the moment” as he has been dealing with the problems in the last one year. Planning Commission Deputy Chairman Montek Singh Ahluwalia also noted that Dr. Rajan is coming in at a tough time but he has a terrific academic and professional background.

“It’s a very tough time, we need someone who can give direction...the important thing is giving leadership for the next five years on how should the Indian financial system move. I think Rajan will be the best person to do that,” he said.

He is known throughout the world for his forthright and frank views.