Time for serious action.
The governor-designate of the RBI will have to rethink or temper many of his past positions that have been at variance with the central bank and the finance ministry
Expectations are running high about the Reserve Bank of India (RBI) governor-designate, Raghuram Rajan — unusually for an RBI governor, his appointment was not just reported by but also commented on editorially in the foreign press. Living up to these expectations will be a huge challenge for Dr. Rajan. It is bad enough that the Indian economy has to cope with falling growth, high inflation and an adverse external position. What makes things more difficult for him is that many of his past positions are at odds either with those of the finance ministry or the RBI or both.
Dr. Rajan needs to tread warily on three issues in particular. One, whether the RBI’s mandate should be confined to price stability or whether it needs to pursue other objectives as well, such as growth, currency stability and financial stability. Two, whether corporate houses should be granted bank licences and based on what criteria. Three, the role of the Financial Stability and Development Council (FSDC).
Begin with the mandate of the central bank. In its report in 2008, the Committee on Financial Sector Reforms (CFSR), that Dr. Rajan chaired, made its position clear. “This Committee feels that monetary policy should be reoriented towards focusing on a single objective, and there are good reasons why this objective should be price stability (defined as low and stable inflation). An exchange rate objective would limit policy options for domestic macroeconomic management and is not compatible with an increasingly open capital account.”
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