6 key challenges for Raghuram Rajan

A look at the immediate challenges for the incoming RBI Governor

The immediate priority for the new governor will be to draft the mid-quarter review of RBI’s monetary policy on September 18 - within a fortnight of taking charge. But the long-term challenges that Rajan has to address are:

 

1) North Block – Mint Road relationship:  

 

The relationship between the finance ministry and the Reserve Bank of India governor’s office has hit rock bottom. It will be a challenge for Rajan to improve the relationship at a time when the economic scenario is deteriorating.

 

2) Recovery of rupee: 

 

Perhaps the biggest challenge for the new governor will be to strengthen the rupee which has depreciated more than 12% in the current financial year, and the drivers of the weakness are not entirely in control of Indian policy makers.

 

3) Recouping FX reserves: 

 

The foreign exchange reserves is at a three- year low and could cover imports for about six and half months, lower than what is seen as providing stability to the currency. Replenishing the forex kitty will be a key task.

 

4) Keeping inflation under check: 

 

After fighting price rises for close to three years, outgoing governor D Subbarao finally brought WPI inflation below 5 per cent – seen as the tolerance threshold of the central bank, though consumer price inflation is still high.

 

5) Reversal of liquidity tightening measures:  

 

If Subbarao decides to continue with the liquidity tightening measures till September 4, or perhaps introduces new measures, then Rajan has to face the challenge of withdrawing those measures. That's because the timing of such a step will be critical for exchange rate stability.

 

6) New bank licences: 

 

Rajan takes charge at a time when the banking regulator is in the process of giving fresh licences for banks after more than a decade and for the first time decided to allow industrial houses. Rajan faces the challenge of selecting the ‘fit and proper’ candidates from the 26-odd applicants.  

HAVE YOUR SAY: What are the first few decisions Rajan should take as RBI chief?