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India’s New Central Bank Leader May Have a Short Honeymoon India’s Central Bank Chief May Have a Short Honeymoon
(about 4 hours later)
MUMBAI, India — Indian newspapers have been gushing about the incoming governor of the central bank, Raghuram Rajan, in terms usually reserved for Bollywood film stars: his trim physique, his long-distance running, even his “rather photogenic appeal,” as The Mumbai Mirror tabloid wrote this week. MUMBAI, India — Indian newspapers have been gushing about the new governor of the central bank, Raghuram Rajan, in terms usually reserved for Bollywood film stars: his trim physique, his long-distance running, even his “rather photogenic appeal,” as The Mumbai Mirror tabloid wrote this week.
This may not last long.This may not last long.
Mr. Rajan, 50, took charge on Wednesday of the Reserve Bank of India, which has tried and failed to stop the steep decline of the rupee against the dollar. India’s chronic inflation is almost certain to move higher in the coming months, given the country’s heavy dependence on imported oil priced in dollars. The stock market is plunging as economic activity slows by the day.Mr. Rajan, 50, took charge on Wednesday of the Reserve Bank of India, which has tried and failed to stop the steep decline of the rupee against the dollar. India’s chronic inflation is almost certain to move higher in the coming months, given the country’s heavy dependence on imported oil priced in dollars. The stock market is plunging as economic activity slows by the day.
Yet unlike Ben S. Bernanke, chairman of the Federal Reserve, Mr. Rajan has very little political independence in his new job. Some of the biggest problems bedeviling the Indian economy are beyond his control, like the trade and government budget deficits and the crippling shortage of roads and other infrastructure.Yet unlike Ben S. Bernanke, chairman of the Federal Reserve, Mr. Rajan has very little political independence in his new job. Some of the biggest problems bedeviling the Indian economy are beyond his control, like the trade and government budget deficits and the crippling shortage of roads and other infrastructure.
All of his policy options carry big risks that could antagonize large sectors of the public, who will soon forget the rapturous accounts of his athleticism and charm.All of his policy options carry big risks that could antagonize large sectors of the public, who will soon forget the rapturous accounts of his athleticism and charm.
“Any entrant to the central bank governorship probably starts at the height of their popularity,” Mr. Rajan said at a news conference early Wednesday evening. “Some of the actions I take will not be popular. The governorship of the central bank is not meant to win one votes or Facebook ‘likes.' ” “Any entrant to the central bank governorship probably starts at the height of their popularity,” Mr. Rajan said at a news conference early Wednesday evening. “Some of the actions I take will not be popular. The governorship of the central bank is not meant to win one votes or Facebook ‘likes.’ ”
Mr. Rajan, a University of Chicago finance professor, used his initial news conference to announce a long list of financial deregulatory measures that he plans in the coming weeks and months. These included issuing more licenses for new banks, making it easier for banks to open branches across the country and gradually lowering the percentage of assets that banks must hold in government securities – three steps aimed at increasing competition in India’s banking sector, long seen by critics as a clubby, cautious industry reluctant to lend to small and medium-size businesses or farmers. Mr. Rajan, a University of Chicago finance professor, used his initial news conference to announce a long list of financial deregulatory measures that he plans in the coming weeks and months. These included issuing more licenses for new banks, making it easier for banks to open branches across the country and gradually lowering the percentage of assets that banks must hold in government securities — three steps aimed at increasing competition in India’s banking sector, long viewed by critics as a clubby, cautious industry reluctant to lend to small and medium-size businesses or farmers.
The most immediate question facing Mr. Rajan, a former chief economist for the International Monetary Fund whose most recent job has been as chief economic adviser to Prime Minister Manmohan Singh, lies in how to halt the fall of the rupee. He said nothing on Wednesday evening about monetary policy, deferring the subject to a statement to be issued on Sept. 20.The most immediate question facing Mr. Rajan, a former chief economist for the International Monetary Fund whose most recent job has been as chief economic adviser to Prime Minister Manmohan Singh, lies in how to halt the fall of the rupee. He said nothing on Wednesday evening about monetary policy, deferring the subject to a statement to be issued on Sept. 20.
Currency market intervention by the Reserve Bank has helped limit the rupee’s losses this week, and it even gained 0.94 percent on Wednesday, to 67.09 to the dollar. But the rupee’s slide through the summer and its continued weakness has fostered speculation in financial markets that Mr. Rajan might raise short-term interest rates in his first week in office. Currency market intervention by the Reserve Bank has helped limit the rupee’s losses this week, and it even gained 0.94 percent on Wednesday, to 67.09 to the dollar. But the rupee’s slide through the summer and its continued weakness have fostered speculation in financial markets that Mr. Rajan might raise short-term interest rates in his first week in office.
A sliding currency pushes up inflation. An inflation-fighting central banker could raise interest rates. Higher rates would make investment in India more attractive to foreign and domestic money managers who have been hustling to move money out of the country. It could help curb inflation, already approaching 10 percent even before the full effect of rising import prices is felt in the coming weeks.A sliding currency pushes up inflation. An inflation-fighting central banker could raise interest rates. Higher rates would make investment in India more attractive to foreign and domestic money managers who have been hustling to move money out of the country. It could help curb inflation, already approaching 10 percent even before the full effect of rising import prices is felt in the coming weeks.
But with the economy already growing at its slowest pace since the worst of the global financial crisis in early 2009, India’s business establishment is fiercely opposed to any increases in interest rates. The Confederation of Indian Industry, the country’s most prominent business coalition, reiterated on Tuesday its call for the Reserve Bank of India to cut short-term interest rates by a full percentage point. But with the economy already growing at its slowest pace since the worst of the global financial crisis in early 2009, India’s business establishment fiercely opposes any increases in interest rates. The Confederation of Indian Industry, the country’s most prominent business coalition, reiterated on Tuesday its call for the Reserve Bank of India to cut short-term interest rates a full percentage point.
“The last thing you want is to choke off any hope of growth by raising” the benchmark interest rate, said Omkar Goswami, the chairman of CERG Advisory, a consulting firm based in Delhi, and an independent director of Indian companies like Infosys, a big outsourcing company, and IDFC, a financial conglomerate.“The last thing you want is to choke off any hope of growth by raising” the benchmark interest rate, said Omkar Goswami, the chairman of CERG Advisory, a consulting firm based in Delhi, and an independent director of Indian companies like Infosys, a big outsourcing company, and IDFC, a financial conglomerate.
Mr. Rajan has a few longer-term options. The Indian government could issue dollar-denominated bonds or seek a loan from his former colleagues at the I.M.F. Either step would replenish and expand the Reserve Bank’s supply of foreign exchange for further currency market intervention if the rupee started tumbling again.Mr. Rajan has a few longer-term options. The Indian government could issue dollar-denominated bonds or seek a loan from his former colleagues at the I.M.F. Either step would replenish and expand the Reserve Bank’s supply of foreign exchange for further currency market intervention if the rupee started tumbling again.
But it is not going to be solely his call. In contrast with the political independence of the Federal Reserve or the European Central Bank, the Reserve Bank of India, headquartered here since before the country’s independence from Britain in 1947, is required by law to consult closely and take direction from the government in New Delhi.But it is not going to be solely his call. In contrast with the political independence of the Federal Reserve or the European Central Bank, the Reserve Bank of India, headquartered here since before the country’s independence from Britain in 1947, is required by law to consult closely and take direction from the government in New Delhi.
Sometimes the government is unusually open, at least by Western standards, in pushing around the Reserve Bank. In late April, a top adviser to Mr. Singh, the prime minister, said publicly that there was a “case for R.B.I. to cut interest rate” policy, and added,” I think we have a case for stronger growth.”Sometimes the government is unusually open, at least by Western standards, in pushing around the Reserve Bank. In late April, a top adviser to Mr. Singh, the prime minister, said publicly that there was a “case for R.B.I. to cut interest rate” policy, and added,” I think we have a case for stronger growth.”
The adviser who made the remarks was Mr. Rajan. The Reserve Bank of India took action that resulted in the rupee slowly sliding. It has fallen every month since then.The adviser who made the remarks was Mr. Rajan. The Reserve Bank of India took action that resulted in the rupee slowly sliding. It has fallen every month since then.
Less than three weeks after the Reserve Bank acted, on May 22, Mr. Bernanke told Congress that the Fed could start reducing its asset purchases in the coming months. The suggestion that the Fed might buy fewer bonds resulted in a drop in bond prices, pushing up yields, and prompting international investors to begin shifting money out of emerging markets like India and into the United States.Less than three weeks after the Reserve Bank acted, on May 22, Mr. Bernanke told Congress that the Fed could start reducing its asset purchases in the coming months. The suggestion that the Fed might buy fewer bonds resulted in a drop in bond prices, pushing up yields, and prompting international investors to begin shifting money out of emerging markets like India and into the United States.
India’s leaders appear to have been taken by surprise. Mr. Rajan and other leading policy makers had been framing the national discussion over interest rate policy in terms of whether the Reserve Bank should keep rates fairly high to fight inflation or start cutting them to rekindle economic growth.India’s leaders appear to have been taken by surprise. Mr. Rajan and other leading policy makers had been framing the national discussion over interest rate policy in terms of whether the Reserve Bank should keep rates fairly high to fight inflation or start cutting them to rekindle economic growth.
“The R.B.I. did not have a view on what the Fed would do,” said Madan Sabnavis, the chief economist of Care Ratings, a big Indian credit ratings agency headquartered in New Delhi.“The R.B.I. did not have a view on what the Fed would do,” said Madan Sabnavis, the chief economist of Care Ratings, a big Indian credit ratings agency headquartered in New Delhi.
As investors began pulling large sums of money out of India, the Reserve Bank effectively reversed course in mid-July and began tightening monetary policy. But it did so in a face-saving way that attracted little attention outside of India — raising the cost for banks to borrow money. As investors began pulling large sums of money out of India, the Reserve Bank effectively reversed course in mid-July and began tightening monetary policy. But it did so in a face-saving way that attracted little attention outside India — raising the borrowing cost for commercial banks that are especially heavy borrowers from the central bank.
Faced with double-digit borrowing costs, banks began cutting back on lending, which has hurt many businesses in India and contributed to a further slowing of the economy.Faced with double-digit borrowing costs, banks began cutting back on lending, which has hurt many businesses in India and contributed to a further slowing of the economy.
Mr. Rajan’s supporters said he should not be blamed for putting pressure on the Reserve Bank in late April to reduce interest rates. They said he was only voicing a widely held view in the government at the time that inflation was beginning to recede.Mr. Rajan’s supporters said he should not be blamed for putting pressure on the Reserve Bank in late April to reduce interest rates. They said he was only voicing a widely held view in the government at the time that inflation was beginning to recede.
Mr. Rajan said on Wednesday evening that he would not discuss past monetary policy decisions.Mr. Rajan said on Wednesday evening that he would not discuss past monetary policy decisions.
Like many central bankers, Mr. Rajan leans toward putting a greater emphasis on reducing inflation and is reluctant to risk higher inflation for the sake of short-term increases in economic growth, people who know him said. Mr. Rajan seemed to confirm that at his news conference early Wednesday evening, when he emphasized the importance of price stability and low inflation. Like many central bankers, Mr. Rajan leans toward putting a greater emphasis on reducing inflation and is reluctant to risk higher inflation for the sake of short-term increases in economic growth, people who know him said. Mr. Rajan seemed to confirm that at his news conference early Wednesday evening, when he emphasized that the role of the bank was monetary stability. “Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures,” he said.
Mr. Rajan also has a history of skepticism about financial deregulation, having warned in a paper in 2005 that financial innovations had made credit markets more risky and could prompt a financial crisis. Mr. Rajan also has a history of skepticism about financial innovations, having warned in a paper in 2005 that they had made credit markets more risky and could prompt a financial crisis.
That was not a popular view at the time. Lawrence H. Summers, the former Treasury secretary , now said to be the chief candidate to lead the Fed, publicly described Mr. Rajan’s paper then as “slightly Luddite” and “largely misguided.” That was not a popular view at the time. Lawrence H. Summers, the former Treasury secretary, now said to be the chief candidate to lead the Fed, publicly described Mr. Rajan’s paper then as “slightly Luddite” and “largely misguided.”