Raghuram Rajan's immediate challenge will be tackling the sliding rupee.
Raghuram Rajan Is Viewed as a Reform-Minded Outsider in a Policy-Making Role Long Held by Indian Bureaucrats
India appointed Raghuram Rajan, a former chief economist of the International Monetary Fund with a reputation for pro-growth policies, as head of the country's central bank.
Indian Prime Minister Manmohan Singh approved Mr. Rajan's appointment as governor of the Reserve Bank of India for a three-year term, Finance Minister P. Chidambaram said on Tuesday.
The 50-year-old Mr. Rajan, who has been the chief economic adviser to India's finance ministry since August 2012, is viewed as a reform-minded outsider in a job traditionally held by veteran bureaucrats or heads of India's state-run financial institutions. Mr. Rajan will succeed Duvvuri Subbarao, whose tenure ends on Sept. 4.
Mr. Rajan's appointment comes as the South Asian economy is in the midst of one of its most challenging economic periods in years. Growth has slowed to the weakest pace in a decade and the Indian currency has depreciated sharply.
The rupee hit a fresh low Tuesday to 61.80 for one U.S. dollar on the back of selling of the currency by importers, but it pared the losses after news of Mr. Rajan's appointment. The currency has fallen by more than 12% since May, fueled by global investors' reallocation of funds from emerging markets to the U.S. as its economy picks up.
While the shift in funds has hurt other currencies as well, it has hit the rupee harder because of India's large current-account deficit, which was a record 4.8% of gross domestic product in the previous financial year through March.
Mr. Rajan's immediate challenge will be to stabilize the rupee without sacrificing growth, amid wavering investor confidence in India.
Speaking after his appointment on Tuesday, Mr. Rajan acknowledged that India's economy is going through a challenging time.
"We have no magic wand to make the problems disappear instantaneously. But I have no doubt we will deal with them," he told reporters.
Investors and economists welcomed the appointment of Mr. Rajan, who has advocated the need for India to continue opening up to greater private investment. Mr. Rajan is "perceived by the markets as a pro-growth policy maker," said K. Harihar, head of treasury at Mumbai-based FirstRand Bank Ltd.
Mr. Rajan, a professor at Chicago University's Booth School of Business, has risen quickly in the economic world. In 2003, he became the youngest person to be appointed as IMF's chief economist and the first non-Westerner in that position.
Mr. Rajan gained attention for cautioning as early as 2005 that the era of low-interest rates spawned by former U.S. Federal Reserve chief Alan Greenspan could lead to problems in the global economy. Sounding the warning at a Jackson Hole symposium honoring the then-outgoing Federal Reserve chairman, Mr. Rajan initially came under attack but was later hailed for anticipating the risks that led to the 2008 global financial crisis.
Born in Bhopal, in the central Indian state of Madhya Pradesh, Mr. Rajan as a child lived in Indonesia, Sri Lanka and Belgium, where his father worked as a civil servant. He holds a business degree from the prestigious Indian Institute of Management, Ahmedabad, and a Ph.D. from MIT. Mr. Rajan moved to India last year to join the finance ministry, shortly after Mr. Chidambaram took over as finance minister.
In recent weeks, Mr. Rajan has been actively engaging with the media to deliver the government's message that it is considering a range of measures to help the rupee, including steps to reduce imports and encourage exports.
The rupee's depreciation has already marred the legacy of Mr. Subbarao, who has served as RBI governor for the past five years and was able to bring India's high inflation rate to what it considers more reasonable levels.
Under Mr. Subbarao, the RBI has taken a series of steps to stabilize the rupee, including bold measures in mid-July that restricted liquidity in the banking system, a tool it had last used during the Asian financial crisis in 1998. The RBI said it would lend only up to 0.5% of banks deposits, which amounted to less than 400 billion rupees ($6.7 billion) lately, to local banks at its main policy lending rate of 7.25%. RBI also made it more expensive for banks to borrow beyond this limit.
These steps were meant to make the rupee dearer by reducing the amount of money in the financial system.
But economists fear that if they remain in place for two to three months, they could push long-term interest rates higher and choke off credit to the economy. Higher borrowing costs would further hurt India's economy, which grew 5% in the previous financial year through March.
Meanwhile, the rupee has continued to fall.
RBI's "measures have not worked because they are using the wrong policy instrument for the wrong target," said Surjit Bhalla, chairman of New Delhi-based hedge fund Oxus Investment.
"The currency is impacted most by growth, and raising interest rates doesn't really make a difference to it."
The central bank said last week that its measures would be rolled back when the rupee is more stable, but didn't indicate a time frame.
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