Mon, Sep 09, 2013 - Page 15 News List

New India bank boss has uphill fight


Newly appointed governor of the Reserve Bank of India Raghuram Rajan arrives at the RBI headquarters in Mumbai on Wednesday last week.

Photo: AFP

The euphoria which greeted new Indian central bank Governor

Raghuram Rajan has been unprecedented in India’s normally sober financial world, but the honeymoon may be shortlived.

Analysts say it is a mistake to believe the suave star economist, whose first day on the job last week that one financial daily likened to the “central banking equivalent of a blockbuster movie opening,” is a miracle man who can rescue India’s ailing economy.

“There was tremendous elation among market participants over Rajan’s appointment,” said Ajay Bodke, strategy head of Mumbai-based investment house Prabhudas Lilladher.

“But we need to temper that exuberance and look dispassionately at the economic fundamentals and that picture is not good,” he said.

The former IMF chief economist has been plunged into a maelstrom of a record current account deficit — the broadest measure of trade, a hefty fiscal deficit, stubborn inflation, a weak currency and a sharp economic slowdown.

Analysts say Rajan, famed for forecasting the 2008 global financial meltdown, can provide symptomatic relief by using various mechanisms to lure overseas funds to cover the high current account deficit.

Yet the government holds the most important levers for reviving economic growth, cutting public subsidies and the twin deficits, and restoring foreign investor confidence, analysts say.

With elections due next May and the government struggling in the polls, it may be hard for the ruling left-leaning Congress party to take any tough decisions, analysts say.

India urgently needs to cut diesel subsidies to lower its massive fuel import bill, which is ballooning its current account deficit — but Indian Foreign Minister Salman Khurshid conceded that such a move “has political implications.”

The economy has gone dramatically downhill since the “Indian Summer” of the last decade, when growth regularly topped 8 percent and 9 percent, while the Congress-led government has become mired in corruption scandals that sent foreign investors fleeing.

The economic slowdown risks a shortfall in the government’s tax revenue projections, exacerbating the fragility of India’s finances.

India’s economy grew 4.4 percent in the quarter ended June, the weakest pace since 2009 when the world was reeling from the international financial crisis.

Now the country is being called the “sick man of Asia” and is facing the threat of becoming the first of the BRICS nations (Brazil, Russia, India, China and South Africa) to lose its investment credit status.

Still, Rajan, 50, has hit the ground running. In his first speech on Wednesday, he outlined plans to draw more funds from abroad to support the rupee and free up financial markets and the banking sector. The rupee has lost nearly a fifth of its value against the US dollar since the start of the year.

Rajan radiated an energy that contrasted with the normal crawling pace of Indian policymaking in a performance, which was both “bold and brilliant,” Raghuvir Srinivasan, business editor of The Hindu newspaper, wrote.

So far, the so-called “Rajan-effect” is holding. The Bombay Stock Exchange’s benchmark index surged more than 1,000 points in the last three trading sessions, while the rupee staged a strong rally to reach 65.24 to the US dollar, up from a record low of 68.85 last month.

However, Barclays noted India still faces risks from an expected paring of US stimulus triggering outflows from emerging markets and the threat of higher oil prices amid turmoil in the Middle East.

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