Raghuram Rajan and the burden of expectations

Never before has the appointment of an RBI governor got so much coverage in the media.

Numerous articles have already been published in the newspapers and electronic media analysing threadbare incoming governor Raghuram Rajan’s earlier comments and how they may throw some light on his future actions as the head of the central bank.

A Times of India report hails a world-class economist becoming the governor of the RBI. There were also reports that said the rupee, which was on a bottomless fall yesterday, actually managed to pullback a little as the news of Rajan’s appointment flashed in the media.

But just how much do we expect from Rajan, who is credited with foreseeing the 2008 financial crisis in 2005?

This is not to doubt his credentials at all for we do not have many economists with his acumen. But definitely, there is a burden of expectation.

It is keeping this in mind that Rajan said in yesterday’s media briefing that there was no magic wand to resurrect the economy. And rightly so.

As a manager of the monetary policy, there is very little that the central bank can do to revive a sagging economy. At the most, it can nudge the government to take corrective action on the fiscal side, as present Governor D Subbarao did many a time.

But still, there are expectations that Rajan may have an unconventional approach towards the central bank and its functions.

For one, he has good understanding of the vagaries of global economy, which will come in handy for him to deal with the expected large outflows once the US starts tapering off its stimulus.

“Rajan’s work as chair of the financial sector reforms panel and expertise in global financial markets five him a unique perspective,” Chanda Kochar, MD and CEO, ICICI Bank, has been quoted as saying in The Times of India.

Clearly, he has the calibre and also the boldness, as many commentators have said.

Among his much-discussed feat is the speech he made in 2005, which warned the financial development may have actually made the world riskier. Significantly, he was delivering his speech at a conference of economists where Alan Greenspan, the strong proponent of financial deregulation, was being facilitated.

“To take a public stand while in a top official position, as Rajan did, took remarkable courage,” Christopher Swann a Reuters BreakingViews columnist points out.

He says other economists, who had predicted the impending doom, including Nouriel Roubini, “cast stones from the sidelines”.

“Rajan has continued to be brave, although his often expressed doubts about the effectiveness of extreme monetary policy are no longer totally unconventional,” the column says. (Read here)

The pertinent question to ask is that will this bravery also prove to be his Achilles’ heel in India?

One has to remember that the RBI has been perceived as an institution with some level of independence, unlike many other Indian regulators which just toe the line of the political bosses. At least, the RBI heads have enjoyed freedom to the extent that they could push the government to bring about fiscal reforms.

A case in point is Subbarao, during whose tenure the RBI held back rate cuts until the government pushed through fuel price reforms.

However, Subbarao’s actions had not gone down well with the finance ministry and had to finally move on as he did not get a job extension - a proof that boldness may not be a virtue to hold on to for an RBI Governor.

In this backdrop, the great expectations that are preceding his appointment as RBI Governor can act as a burden on Rajan. After all, as he said, there are no magic wands to fix the economy. It is the government who has the final say, not the central bank.