Reserve Bank of India Governor Raghuram Rajan is remarkably modest in attributing to others much of the success he has had in turning round the fortunes of the rupee and that of India’s finances in general.
“One of the biggest pieces of good news we have had in recent months has been the emergence of a stable government [under Indian Prime Minister Narendra Modi] and that has put to rest concerns about political stability in India,” Rajan told Emerging Markets. “A central bank has to thank its lucky stars when it has political stability because that does much of the heavy lifting.”
In fact Rajan has done a good deal of heavy lifting himself since he moved into the governor’s chair. “I came in September 2013 when we were in the midst of the taper tantrum and the currency was testing new lows,” he recalls. “There were concerns about whether [the rupee] would go into free fall and we were dubbed as being among the Fragile Five.”
What the Indian government and the central bank had to work on “was to create a different story,” says Rajan. The first thing the government did was to “work on bringing down the current account deficit and the easiest way to do that in the short term was to stamp down on gold imports [which had] gone through the roof. But my sense was that we had to take the focus off the exchange rate and focus on long term value, which meant giving people confidence that we could bring down inflation.”
Inflation was running at an annual rate of around 10% when Rajan arrived and actually rose above 11% at the end of 2013. “We announced a move toward targeting consumer price inflation, which was the more difficult number to bring down, so that people got a sense that we were serious. I had a committee under my deputy governor look at how we could put in place a modern monetary framework. They suggested a glide path for bringing down inflation and we are firmly established on that path.”
MONEY IN THE BANK
To bolster confidence, “we had to show people that we could raise money if needed. Even though we had more than $250bn in reserves that still did not seem to convince anyone that we had plenty of money. We did a special deposit scheme for non-resident Indians which collected $34bn in the space of three months. We also announced a full set of financial sector reforms that we could undertake ranging from licensing new banks to deepening financial markets.”
This set of measures “started kicking in and, combined with the fact that the current account deficit was coming down, helped build confidence, so much so that by January when [there was] a mini taper tantrum and a bunch of emerging markets suffered significant volatility the rupee was very stable.
“In fact we have been one of the more stable currencies in the world, keeping pace with the dollar and appreciating against the rest of the world in the past few months. We have also built up reserves so we are in a [position] where I don’t think you can place us in the Fragile Five today.”
How much credit will Rajan allow himself for the turnaround? “My [academic] career has exposed me to ideas on what happens when there’s currency turmoil and also my stint [as chief economist] at the IMF,” he says.
But he hastens to share credit with others. “I would say that important factors were my friends who had been central bankers in other countries, especially in Latin America which had similar problems with high inflation and currency depreciation. I would single out Agustin Carstens [of Mexico] and Arminio Fraga [of Brazil] who gave me very good advice.”