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Raghuram Rajan a victim of unrealistic expectations - 4 min read

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By – Jayadeva Prasad Moleyar

Raghuram Rajan has taken over as the 23rd Governor of RBI with a bang and created major news with his first press meet. In fact, Raghuram comes into the scene with the baggage of a lot of expectations from public and the government alike. This is mainly owing to his IIT-IIM-MIT background, World bank-IMF experience and his much famed prediction of the US meltdown of 2008.

It is a welcome change to see someone in the government with the professionalism of an MBA. True to his background in professional management, Rajan has made is entry with a very clear, well thought-out, problem-focussed game plan to tackle the most of the problems the country is in today.

At the onset, it is very important to understand the role and sphere of action of the reserve bank governor. Any governor however good he is, can be effective only in areas where he has jurisdiction and he will not be able to do anything in areas where he has no powers. When one talks about Rajan’s entry into the scene today and what and what not he will be able to do, one has to keep this fundamental framework in mind before making any wishful predictions about his efficacy in the future.
 
Reserve bank by definition covers only one part of the economy which is the monetary policy. The other significant part which is the fiscal policy is controlled by the Finance ministry. Any economic problem including the present Rupee value problem has to do with both the monetary and the fiscal policies.
Successive governments run by shrewd politicians have managed to create an impression in the minds of general public that Rupee value or exchange rate is entirely RBI’s problem. Bureocrats and technocrats of the RBI never had have the political freedom to ward off such anti-propaganda and highlight the real issue involved in the Rupee value.

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Much of what Rajan has announced late Wednesday when he took over has to do with reforms in the monetary policy in general and banking industry in particular. Those are his area of action and those are what he is supposed to do. A review of the existing monetary policy framework itself is a much awaited welcome measure which will go a long way in defining the new economy of India. Added to that, freeing banks from various archaic rules and regulations and making banks a more forward looking player in the economy is definitely a good move.

Raghuram is set out to free banks from taking permission before opening a branch. He will encourage foreign banks to have subsidiaries in India rather than branches in order to garnish more control on them. Bimal Jalan, another efficient man will head the committee which will finalise new bank licenses by Jan 2014. Financial inclusion, growth as well as Inflation control will be the agenda forward.

Trade settlement in Rupee terms is another area worth pursuing. Banks will be take steps to clean-up their balance sheets reducing NPAs and improving recoveries. Consumers will get inflation indexed bonds on consumer price index (CPI) basis by November.etc etc. . . I am sure that he will, as he goes forward, take up measures to control the financial frauds that are rampant in India these days like ponzi schemes, money circulation schemes and the like.
 
It is possible that the Share market must have reacted positively to his statements on banking reforms. It is also possible that his speech would have boosted the sentiment in the forex market a bit but the crux of the matter is that an RBI governor does not have much say in Rupee value.

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Exchange rate for a currency is an arithmetic result of demand and supply of the individual currencies, no doubt. But it is only a technical and a superficial view. One has to go deeper to explore how the demand and supply are created or destroyed – and that is where the solution to the current Rupee crisis lies. Demand-supply of the Rupee and Dollar lies in foreign trade and the overall and relative strengths of the two economies.

The day of hot money is over and Dollars are flying back to the US. Indian economy is throwing up its chronic problems of low growth, high inflation, high deficits-both fiscal and trade. Added to these woes are the low productivity and inferior quality of Indian producers, not to talk about the untrustworthiness of an Indian exporter in the eyes of the importing country.
 
It is up to the government to take measures to boost the economy and foreign trade through its fiscal policies. The real and fundamental solution to economic problems lies there. Indian must emerge as a strong economy with a positive trade balance in order to combat the economic perils of the world and inside.
Mere tinkering of monetary policy alone by Rajan will not help the country much from the overall sense. No doubt it will boost the banking sector and over all technical aspects of money supply to the economy.
Let us not impose unrealistic expectations on Raghuram Rajan as a savior of Indian economy and Rupee value at large.

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