Raghuram Rajan to take charge of the Reserve Bank in India amidst spike in economic challenges

Photo by Dan Dry. © University of Chicago Booth School of Business

Photo by Dan Dry. © University of Chicago Booth School of Business

Raghuram Rajan was one of the few economists who warned of the global financial crisis before it hit. Now, he is preparing to take charge of the Reserve Bank in India during a spike in economic challenges for the country.

In India, growth is at its slowest in several years, and the rupee has hit a low of 61.80 to one U.S. dollar. Rajan, who was previously the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago Booth School of Business and former chief economist at the International Monetary Fund, has spent the past year as counsel on India’s economic reforms. Come September, when Rajan takes office, he plans to initiate a series of measures to stabilize the rupee involving decreasing imports and increasing exports.

While the challenge is great, Rajan has been praised for his rare and essential record of speaking out about economic instability (of the U.S. financial system), as well as his sound warnings regarding India’s economy the past few years. In a now-famous encounter, he predicted the impending crisis at a conference in Jackson Hole in 2005 for outgoing Chairman of the Federal Reserve Alan Greenspan, for which he was attacked as an anti-market Luddite. Three years later, he was proven right and has demonstrated how imbalances—both within the U.S. as well as between the U.S. and the rest of the world—brought about an unstable system which led to the financial crisis in 2008.

In Fault Lines: How Hidden Fractures Still Threaten the World Economy, winner of the Financial Times and Goldman Sachs 2010 Business Book of the Year Award, Rajan shows how the individual choices that collectively brought about the economic meltdown—made by bankers, government officials, and ordinary homeowners—were rational responses to a flawed global financial order in which the incentives to take on risk are incredibly out of step with the dangers those risks pose. He traces the deepening fault lines in a world overly dependent on the indebted American consumer to power global economic growth and stave off global downturns. He exposes a system where America’s growing inequality and thin social safety net create tremendous political pressure to encourage easy credit and keep job creation robust, no matter what the consequences to the economy’s long-term health; and where the U.S. financial sector, with its skewed incentives, is the critical but unstable link between an overstimulated America and an underconsuming world. Rajan outlines the hard choices we need to make to ensure a more stable world economy and restore lasting prosperity.

“Mr Rajan is no administrator but will also have to reform the RBI,” wrote the Economist. “In the 1990s [the RBI] toyed with relinquishing some of its vast empire—it runs everything from monetary policy to public-debt issuance and bank regulation. Recently it has clung to its powers only to find that its multiple goals of stability, growth and low inflation conflict. Mr Rajan’s task is to resolve those contradictions. If he succeeds, Western central bankers, who have seen a proliferation in their responsibilities since the crisis, will have another reason to listen to his views.”

More by Raghuram Rajan:
Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Opportunity
The Squam Lake Report: Fixing the Financial System

More on India:
Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India by Pranab Bardhan
An Uncertain Glory: India and its Contradictions by Jean Dreze and Amartya Sen