RBI governor Raghuram Rajan shot to fame for correctly
predicting the global economic meltdown in 2008. He is the poster boy of the Indian
middle class with all the right education, starting from his schooling in DPS
R.K Puram followed by graduation in electrical engineering from IIT Delhi
followed by his post-graduation from IIM Ahmedabad and, finally, his PhD from
MIT Sloan School of Management. Clearly, he is well educated but is he acting a
little too cocky for an RBI governor?
Being a chief economist at the IMF provided Rajan with a
whole set of challenges, which he faced brilliantly, but as the RBI governor
his tenure has not been that impressive. While initially he was projected as a
rock star governor who will turn-around the fate of the Indian economy with his
bold decision-making; but sadly no concrete steps have been taken to improve
the status of Indian economy.
On one hand he talks about bold new economic policies and
reforms, while on the other hand he talks about how a rate cut is not needed
and the RBI will intervene when necessary. The ground reality is that the
Indian economy is facing a severe cash crunch – one it has never faced before -
and there is virtually no liquidity in the market along with interest rates being
as high as ever.
The Indian rupee is weakening against the dollar and the
volatility has increased the cost of hedging to protect against the fluctuations,
which are as high as 90 paisa a day .The official statement of the RBI is that it
is closely monitoring the situation and will intervene when necessary. Although
foreign reserves are at an all-time high, the RBI is not taking steps to
strengthen the rupee. The RBI keeps clamoring about china being responsible for
the situation and global markets being in a state of turmoil but it fails to factor
in the weak crude prices, which are a whopping 37% of India’s import bill, that
have reduced India’s current account deficits along with reducing inflation due
to lower transportation costs and other indirect factors.
The Indian economy is waiting for a long overdue rate cut,
which the RBI had set aside for tougher times. Globally, governments have
reduced interest rates as well as pumped money into the system but the RBI has
done neither and it appears that it is a mute spectator like all the rest of
us. For the past three economic policies ,the industry has been anticipating
rate cuts but have gotten none or a meagre 25 basis point cut, which banks did
not pass on to industry or consumers. Industrial output is at an all-time low
and Indian exports have fallen for the eighth month in a row despite a weak
rupee.
It seems that Raghuram Rajan is a little too over-confident
and is just a mute spectator while the Indian economy is being hammered – pretending
that the Indian economy is in a great state relative to other countries.
Clearly, something is wrong with our economy and no proactive steps are being
taken to cushion the economy. It’s high time that the governor springs into
action, needless to say a 50 basis point interest rate cut is as essential as ever.
Archit Aggarwal
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