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Indivjal Dhasmana | New Delhi August 06, 2013 Last Updated at 20:33 IST

Raghuram Rajan to be next RBI governor

Chief Economic Advisor succeeds D Subbarao at a time when economy requires contrasting monetary doses After advising the finance ministry on macro economic issues for less than a year in North Block, Raghuram Govind Rajan will now move to Mint Road as the Reserve Bank of India Governor from September 5. His appointment, announced today by Finance Minister P Chidambaram, came at a time when the RBI faces "impossible trinity " trilemma, in the words of incumbent D Subbrao. The trinity is caused by global factors that have unleashed the rupee woes.

Raghuram Rajan

Rajan knows these challenges very well as he has written extensively on central banks' role. He had warned of the crisis before it took global dimension in 2008-09. He had cautioned the central bankers in 2005 of a potential crisis if banks lost confidence in each other. He told reporters today,"These are challenging times for the Indian economy." In the same vein, he asserted that the country has a great promise. " No one can have any doubt about the country's promise." The former IMF chief economist, who was preferred over economic affairs secretary Arvind Mayaram and Planning Commission member Saumitra Chaudhuri as the next RBI governor, has a three-year time to convert these challenges into opportunities as the rupee is making new records in terms of its fall against the dollar. On the other hand, liquidity choking measures of RBI has not arrested the fall, but these may come in the way of boosting sagging economic growth that touched a decade low of five% in 2012-13. Though no one should accept immediate results from his actions. "We do not have a magic wand to make the problems disappear instantaneously... But, we will deal with them," Rajan, who will be the second youngest RBI governor after Manmohan Singh, said. The renowned economist would be 50 years and seven months when he becomes RBI governor, while Singh was eleven days short of 50 years when he got the coveted job in 1982. However, Rajan was the youngest chief economist at IMF between 2003 and 2006, where he went after his teaching stints in the Chicago University, the Stockholm School of Economics and the Kellogg School at Northwestern University. Rajan did his B.tech from IIT before doing MBA from IIM, Ahmedabad, and PhD from MIT. "Saving Capitalism from the Capitalists:Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity", the book he has co-authored with fellow Booth School of Business, Chicago professor Luigi Zingales, may test his skills when he gives new banking licenses to corporates. Though he talked of creating wealth, he did not even take what the government owed him. Rajan used to take just Re one a month salary for his job in the Finance Ministry. However, he used to go for his teaching assignments abroad.

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Rajan's appointment also comes at a time when the Finance Ministry and RBI do not seem to be on the same page. When he joined as the chief economic adviser in the finance ministry almost a year back, he had told Business Standard," If my advice comes at odds with politics, I would emphasise economics." He also started one of his articles, posing a query,"What should central banks do when politicians seem incapable of acting?" Today, he said the government and the Reserve Bank are working together to address the challenges faced by the economy. As capital inflows to emerging markets take a hit as soon as Federal Reserve Chairman Ben Bernanke comes out with a cautious statement on quantitative easing (QE), Rajan's article written in 2012 may makes an interesting read. While commending QE1, he writes, "QE2, in which the Fed bought long-term government bonds, did not have a discernible effect on long-term government interest rates. Indeed, with its recent decision to pursue QE3, the Fed is focussing once again with the mortgage-backed security, but given that the market is much healthier now, it is unclear how much good this will do." In his now famous book-- Fault Lines:How Hidden Factors Still Threaten the World Economy-- Rajan argues that serious flaws in the economy are also to blame, and warns that a potentially more devastating crisis awaits if they aren't fixed. This is the advice that he will need the most as the RBI governor if the challenges faced by India is not to be turned into a full-blown crisis.

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