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RBI Governor needs a magic wand

Mumbai, Aug 7 () : RBI Governor Raghuram Rajan’s appointment has been widely welcomed by India Inc and the banking sector. He takes over the apex bank at a time when the country is facing a worst slowdown and falling rupee. His predecessor Rao too faced a crisis soon after he took charge-the crash of Lehman brothers which triggered recession globally. This time the problem is more within the country.

Rao’s unconventional methods have not helped the rupee which is slipping and sliding. Manufacturing and services sectors are flat. Yesterday, the US Fed once again made it clear that there was no need to have $85 billion bond buying going on. This means investments in dollars to Indian stocks is to remain elusive.

The dollar is all important as India has a huge import bill and is much more than what it has to get through exports- current account deficit (CAD) is the term used for it. With banks borrowing at 10% interest from RBI, the business loans are higher. The stock market does not look good. Foreign investors are taking the money out and yields from bonds is higher. Billions in rupee loans are getting more time to pay.

Rajan in his first media meet said he has no magic wand to clear the economic mess. This is what Dr Singh an economist and a PM to boot told the Parliament. The opposition asked as to whether the people had voted for a magician who has lost his wand.

Rajan’s challenges are many. Yesterday morning the rupee touched Rs 61.80 and would have moved to Rs 62 but it recovered to Rs 60.77. Rajan has to curb speculation in rupee and make it stable and how will he get the dollars to flow into India?

Companies operate on a 90-day cycle of their working capital and this is funded by banks. With RBI liquidity-tightening measures, the companies will not be able to expand and in another quarter the balance sheets will show nil growth and in many cases a shut-down.

The options before Rajan will produce pain to the economy. If he raises interest rates, it would curb rupee volatility but hurt the banks and industry. The next option is to allow the rupee to take the natural course and decline. This again will pinch the importers and our CAD. If he reverses the liquidity tightening measures, then it would bring speculation back.

Rajan is more of a think tank than hands on banker. He once equated India’s economic situation to a similar one that took place in US. He said US trained the workforce to adapt to the new situation and goaded the financial sector to encourage new start-ups. All this is out of the RBI mandate and nothing that can produce immediate results.

Rao had said that the inflation was something that the political bosses have to check. It was something that is linked to improving the supply chain and infrastructure. The only positive note of the appointment of Rajan will be that RBI and Finance ministry will be on the same page this time. Apart from that to get investments in dollar flow to India will surely need a magic wand.