Staff Writer
Columbus CEO

c.2013 New York Times News Service

MUMBAI, India — Raghuram Rajan, the head of India’s central bank, began his career as an economic theoretician. But a willingness to delve into the mechanics of an economic system may prove to be a bigger asset as he tries to straighten out India’s economy.

Like a longtime military academy strategist suddenly given an army to lead, Rajan, 50, a prominent University of Chicago business school economist, now finds himself running the Reserve Bank of India, one of the most important central banks in the developing world.

His track record in his two months in office suggests a reluctance to embrace the monetarism for which the University of Chicago economics department has been known, while he has supported limited financial deregulation.

Along the way, he has avoided any signs of doctrine, preferring to see the results of each move before acting again.

“I’m willing to be persuaded by the data,” he said in an interview at the central bank, in a wood-paneled reception room with one wall lined with the portraits of his predecessors.

On monetary policy, Rajan has been quietly pushing down short-term interest rates to restart the stumbling economy. He cloaks his interest rate moves with tough talk about inflation, now running at 9.8 percent for consumer prices. But he has been so cautious about saying so that even some investment banks have expressed confusion.

Rajan said that he had sought to communicate clearly but shunned being labeled dovish or hawkish.

“We have to play it a little bit carefully,” he said. “We don’t want to kill an already weak economy, but we want to make sure everyone understands we have a very firm eye on inflation.”

So far, he has shaken up the country’s insular banking establishment by moving quickly to begin issuing licenses for the establishment of new Indian banks. He has pushed banks and debt tribunals to remove influential business leaders during bankruptcy proceedings, instead of quickly writing off their debts. And on Wednesday, he issued new regulations making it possible for foreign banks to set up nationwide branch networks.

In doing so, he is plunging into the messy intersection of business and politics that has bedeviled India’s economic development since its independence from Britain in 1949. Steep tariffs and extensive regulations have long protected the leading business families from foreign and domestic competitors alike.

Rajan has given himself some political cover, however. He has named a special committee to oversee the banking license process and brought Bimal Jalan, a prominent former Reserve Bank governor with close links to the political opposition, out of semiretirement to run it.

Jalan said in a telephone interview that he was giving attention to widening the poor’s access to banking services. He expressed caution about allowing new banks to be closely affiliated with businesses active in other sectors of the economy.

“There is a tremendous amount of concern after 2008 about banks moving into other areas,” he said.

Financial markets have rallied since Rajan took office Sept. 4, with the major stock index up 12 percent since then and the rupee rebounding 8.5 percent against the dollar. Part of the increase, however, reflects the decision seven weeks ago by the Federal Reserve in Washington to delay tapering its monetary stimulus. That has made emerging markets temporarily look more attractive.

Rajan has twice raised the rate at which commercial banks borrow part of their funds. But he also has twice cut the interest rate that commercial banks use for the rest of their borrowing. Since this is the interest rate that determines the costs of extra borrowing that banks may do to finance new loans, it has a particularly strong effect on the economy and the availability of credit.

Jalan said that the net effect of the Reserve Bank’s recent interest rate moves had been clear to him.

“On the whole, it is equivalent to making credit easier,” he said.


Some prominent Indian economists complain that Rajan is trying to control inflation expectations by talking tough even as he pushes down interest rates. His critics warn that investors may abruptly decide that interest rate moves like the one last week may rekindle inflation.

Keeping inflation under control has long been more important in India than in many countries because so many very poor people in rural India barely earn enough to eat. Their mostly part-time jobs pay wages that are not indexed to inflation, leaving them extremely vulnerable to increases in prices for essentials like food.

“They are at subsistence levels, so higher inflation could make the difference of life or very close to death in some cases,” Rajan said.


Some critics would prefer clearer communication. Reducing the interest rate on the bank borrowing last week “was huge,” said Ajay Shah, an economist at the National Institute of Public Finance and Policy in New Delhi, “but if you read the announcement, you would never know that — they should be speaking clearly.”

While some tariffs have been reduced and administrative rules have been lifted in the last two decades, chronic corruption continues to pervade government dealings with industry in many sectors. That corruption has slowed the economy, but paradoxically, the growing risk of being accused of corruption in the last several years has paralyzed civil servants in many ministries, slowing further project approvals and deregulation.


Few issues are more contentious than the issuance of new bank licenses in the coming months. Rajan said that he hoped transparency in the selection process — and a reliance on extensive comparisons of voluminous applications — would limit the acrimony.

“These are important licenses, to those who get it and those who don’t,” he said. “People who don’t get the licenses I expect will be disappointed and will, presumably if the process is not transparent, want to muddy the process by questioning how it is done. And that is precisely why we need to be as clean and transparent as possible.”


Further complicating the economic landscape for Rajan are national elections next spring in which the opposition Bharatiya Janata Party is widely seen as having a considerable chance of winning power. Before taking office in September, Rajan was the chief economic adviser to Prime Minister Manmohan Singh of the ruling Congress Party.

By tradition, Reserve Bank governors offer their resignation when there is a change of government, but then the new majority party declines the resignation and allows the governor to continue serving the balance of the three-year term. Changes of party can complicate the coordination of economic policy, however, as the governor is not politically independent in the Indian system and is supposed to work very closely with the finance ministry.


Without commenting directly on his own future, Rajan noted that most of the Finance Ministry staff stays in place even when the finance minister changes with the forming of a new government, providing continuity in communications with the Reserve Bank.

Asked if he might need to raise interest rates close to the election, given continued inflation, he replied, “I don’t have a timetable in mind, and I don’t look at the election calendar.”