It isn’t surprising that the markets have reacted favourably to Raghuram Rajan’s first day in office as governor of the Reserve Bank of India. Somewhat uncharitably, the RBI under outgoing governor D. Subbarao was seen as market unfriendly — totally focussed on inflation without heeding growth considerations, besides not being able to contain the rupee’s fall. Thursday’s rise in the value of the Sensex and the rupee suggests market intermediaries expect a change in approach. However, for all the positive vibes the new governor appears to have created, Dr. Rajan is bound to be wary of the reception he has received. True, he does bring impressive credentials to what is arguably one of the toughest jobs in the economic management of the country today. But, as he himself has warned on many occasions, there is no magic wand that can wave away the country’s economic woes. The slowdown in GDP growth, the erosion of business and consumer confidence and above all, the falling rupee, have deeper structural causes that cannot be addressed overnight. Under the circumstances, as any Chicago-trained economist knows only too well, irrational expectations can be counter-productive.
Many analysts have commented favourably on the speed with which Dr. Rajan has got down to work. The agenda he revealed at his first press conference is impressive but the fact is that some of those are incremental steps which would have been taken anyway, probably at a slower pace. For instance, the issuance of new bank licences was already on the cards. Some of the major steps aimed at reorienting the banking structure are already engaging the RBI. These include setting up niche banks for, say, infrastructure, retail and investment banking. CPI-linked inflation bonds as an alternative to gold savings are not a novel idea, but it is good that they figure in the new governor’s short-term agenda. Proposals to deepen financial markets through innovative instruments such as cash-settled 10-year interest rate futures and the dematting of trade receivables are welcome. Small steps such as these can make a big difference. The focus on improving the efficiency of the recovery system and the clear warning to promoters that they cannot use the banking system to recapitalise their failed ventures send a clear signal to deviant corporate borrowers. On the bigger issue of monetary policy objectives, Dr. Rajan has highlighted the importance of inflation targeting: monetary stability and preserving the value of the rupee will be key goals. The emphasis might vary but the overall objectives are the same. The new governor needs to harness his great skills at communication to carry the markets and, equally important, the government.
