The designation of an internationally acclaimed economist as the next Governor of the Reserve Bank seems to have lent a nip to the air, creating expectations of reversals in monetary policy — for the better. That impression is sensed from the person himself and a persona that is evoked: the governor-designate is an ‘outsider,’ he will think out-of-the-box, stay on the same page as the-leading-from-the-front policymakers who wish to revive India’s Dream Run.

Raghuram Rajan: India’s ‘Yes-we-can’ central banker.

What he can do is a good place to learn what he will do. And that depends on one’s view of the place monetary policy enjoys in the galaxy of policymaking. Persistent inflation, weakening currency and a dispirited investment environment with mounting NPAs and current account deficit (CAD) are the bitter fruits of India’s Dream Run. Not the legacy of monetary policy lapses but a recessionary world economy and indifferent, confused or absent guidance from New Delhi. He will undoubtedly have read the RBI’s latest Financial Stability Report on the fallout of stalled infrastructure projects on large corporate groups now highly indebted. That and bank NPAs began with over-optimism during the credit boom till 2008. So the economy needs more than just money; it needs consensus-based fiscal policies, institutional mechanisms that foster investments and discourage or punish corruption.

As Governor, Rajan could and may remind New Delhi about these problems, but then he would be standing on the shoulders of some predecessors.

Where’s the difference?

As for the RBI’s reputation as party-pooper what can he do different? Inflation needs controlling; most central banks use key rates (at times successfully) to achieve that end. The committee he headed in 2008 endorsed the RBI’s anti-inflation priority. It, however, suggested a more hands-off policy for the exchange rate. But that was in the pre-lapsarian age, before the crash of September 2008. Its aftermath heightened simmering currency tensions (between China and US mostly), convincing almost every central bank, even the US Fed, to “influence” exchange rates in a world market with more exporters than importers.

Central banks have limited options to work on a given set of mandates that have to segue in and work with fiscal policy imperatives. But the central bank can influence financial innovation and levels of regulation directly, pervasively; new bank licenses, for instance, will affect the economy immediately. As an economist who foretold the death of Wall Street as it existed before 2008, Rajan can, and should, bring to bear his rich knowledge of that “irrational exuberance.” The RBI’s traditional gradualism on loosening up, once berated, can, in fact, find endorsement by a prescient intellect. As Governor that is where Rajan can make a difference, but not much elsewhere. The rest could just be par for the course — once the hype dies down.

Also read: Can Rajan make a difference as RBI Governor? - YES

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