Will Rajan be good at managing a financial crisis as at predicting one?

The appointment of Raghuram Rajan as the next Reserve Bank of India Governor has been hailed as one of the few right decisions the UPA has done in the last nine years of its existence.

The unprecedented media attention that the appointment is getting is not only because of Rajan's eminence, but also because the economy and the rupee's depreciation have been in focus and are affecting us. There are hopes that he may be able to do a few unconventional moves to fix the ailments.

If he indeed does so, what should be the first step?

Raghuram Rajan. AFP

Raghuram Rajan. AFP

The recent RBI measures that tightened liquidity and raised interest rates in the economy have disastrous impact on growth. Reverse that.

A reversal of these steps would mean that the rupee will have to find its own bottom. May be at 65 or 70 against the dollar. No forgetting the fact that the consequences of this will also be disastrous.

The first and foremost will be the push on inflation. With the retail inflation already near double-digit level, a further upswing here will pinch the lower and middle class harder.

But it will also prompt the government to take steps to put in place a mechanism to plug the leakage in the public distribution system.

The RBI could even nudge the government to hold the implementation of Food Security Bill until it finds methods to meet a possible increase in demand for high-protein food items once the bill is implemented.

Another positive impact that a reversal of the recent steps will have is that it will end confusion in the markets about the policy direction. While the tight liquidity has actually pushed up the rates in the economy, the government has been forcing us to believe that the long-term rates will not go up.

The confusion has resulted in extreme volatility in the financial markets.

Such a decision will prove, as Andy Mukherjee says in his BreakingViews column, that Rajan "is as good at managing financial crises as he is at predicting them".

But will he?

Unfortunately, he may not, because the RBI's independence is limited. Always it is the rulers and their political considerations that have taken a final call on such important monetary policy matters, not the RBI.

The latest proof for this is the outgoing RBI Governor D Subbarao himself, who had to pay a price for the government's inefficiencies at reining in an inflation that was largely its own creation.

The RBI's recent moves to tighten liquidity were the only option left with Subbarao.

Even if he wanted to raise the policy rate and push the government to take responsibility for the spiralling inflation, the political class would not have allowed him to, especially when the elections are round the corner.

This is not the first time the central bank has been cornered like this. Earlier, Subbarao, contrary to the government's wish, had held back rate cuts, reasoning that fiscal correction should precede any move to reduce rate.

The result was the RBI ended up doing all the bad things, while the government looked like fighting a lonely battle against slowdown.

You cannot expect Rajan to bring about a change, at least not that soon, because the onus for that is on the government.

Updated Date: Dec 20, 2014 21:31 PM

Also Watch

Watch: Firstpost test rides the new Thunderbird 500X in Goa and walks you through the Royal Enfield Garage Cafe
  • Tuesday, April 17, 2018 Varun Dhawan on Shoojit Sircar's October, 5-star reviews and working with Anushka Sharma in Sui Dhaaga
  • Saturday, April 14, 2018 Ambedkar Jayanti: Re-visiting Babasaheb's ideals exposes fake Dalit politics of Rahul Gandhi and Congress
  • Monday, April 9, 2018 48 hours with Huawei P20 Pro: Triple camera offering is set to redefine smartphone imaging
  • Monday, April 16, 2018 Rajyavardhan Singh Rathore interview: Sports can't be anyone's fiefdom, we need an ecosystem to nurture raw talent

Also See