From engineering to RBI governorship: Who is Raghuram Rajan?

FP :7 Aug 2013

The government on Tuesday named chief economic advisor Raghuram Rajan as the new Reserve Bank of India governor for a term of three years.

Dr Rajan, a former IMF economist, visiting professor to the World Bank and US Federal Reserve Board and one of the few economists who predicted the 2008 credit crisis will head the RBI.

Rajan takes over from Dr D Subbarao on  4 September.  He takes over the reins of the central bank at a time when the economy is going downhill, the Indian Rupee (INR) is on a free fall, equity and bond markets are nervous and the government at the centre wants quick fixes before the 2014 general elections.

As the 23rd governor of the RBI, Rajan, was chosen for the role ahead of Arvind Mayaram, secretary department of economic affairs and Saumitra Chaudhuri, member, Planning Commission.

Who is Raghuram Rajan?

Rajan is viewed as a pragmatist on monetary policy likely to stick fairly closely to Subbarao’s line on managing inflation. The outgoing governor fought an uphill battle against price pressures for much of his term in an economy plagued by supply-side bottlenecks and legislative and bureaucratic paralysis.

Rajan — ‘Raghu’ to his many friends and colleagues — is rated as one of the most influential economists of his generation. Rajan, 50, will be the second youngest governor after Manmohan Singh, who took charge when he was 10 days short of his 50th birthday.

Bhopal-born Rajan has always been a high achiever: A gold medalist at both IIT Delhi and IIM Ahmedabad, he went on to complete his PhD from the Massachusetts Institute of Technology.

He became the Economic Counselor and Director of Research (Chief Economist) of the International Monetary Fund in September 2003— the youngest ever to be appointed to this post.

In 2003, he also won the first Fischer Black Prize, which is awarded to the most promising economist under the age of 40, by the American Finance Association. He is also a Professor of Finance at the Chicago University’s Booth School of Business.

His most widely-read book, Saving Capitalism from the Capitalist, was co-authored with fellow Chicago GSB professor Luigi Zingales and published in 2004.

In 2005, he predicted the financial crisis of 2008-09, but was brushed aside by economists such as former US treasury secretary and Harvard University president Lawrence Summers, who called him a “Luddite”.

What to expect from Rajan:

Shortly after being named RBI governor-designate, Raghuram Rajan sought to manage expectations, saying that policymakers “do not have a magic wand to make the problems disappear instantaneously”. He, however, added that there was no doubt that “we will deal with them”.

In this Firstpost article, Vivek Kaul writes, Rajan is a firm believer in the fact that high government spending in doling out various subsidies has been a major cause behind India’s high inflation.  Rajan’s thinking on that front doesn’t seem to be much different from that of his predecessor Subbarao. Rajan believes that Indian households need stronger incentives in the form of lower inflation to increase financial savings, which have been declining for a while.

Arjun Parthasarathy writes here that Rajan’s policies will be conservative, as he will not want to create market bubbles. 

His policies will also surprise to create a shock effect that shakes out excesses in the market.