Raghuram Rajan is Here to Fix India

Jacob Harper |

India’s economy has been suffering for some time. The rupee has been dwindling in value for some time, losing 20 percent of its value in relation to the dollar since May and hitting an all time low on Aug. 28. At the same time, the Asian country has been stifled by an outdating financial sector that both spurns outside investment and leaves it open to fraudsters like  Satyam Computer Services, who misstated earnings by $1.47 billion, causing investor’s holdings to evaporate overnight in a calamity that has been referred to as “India’s Enron.”

In 2013 it has become clear the country is in desperate need of modernist reform form the top down. They needed someone to take charge and make sweeping changes, or the country faced sinking even deeper into the economic quagmire they’ve been stuck in all year. On Sept 5 India got what they were looking for when Raghuram Rajan, a “rockstar” economist, took control of the Reserve Bank of India.

Markets responded enthusiastically to the news of his installation, but it’s still unclear exactly what he plans to do. So what can we glean from Rajan’s history that gives an indication of what he plans to do to reinvigorate India’s economy, and whether or not he can bring the country back to its status an an emerging economic superpower?

Fixing the Rupee

Rajan’s first task as chief of the central bank is fixing his country’s currency. As the former chief economist for the International Monetary Fund, Rajan has plenty of experience and expertise in international currency theory, recognizes the rupee problem is a drastic one. Unsurprisingly, then, his immediate reforms will be drastic as well.

On his first day, Rajan instituted several major changes to liberalize and modernize India’s currency, admitting so much change was risky but “as India develops, not changing is even riskier.” Among his new policies was curbing speculation on the currency and open up banking to new entrants. Several Indian banks like ICICI Bank (IBN) have already felt the benefits as more banking licenses are expected to be issued in the country.

Additionally, the RBI has made it so existing banks do not need permission to open new branches. Banks like ICICI are jumping on  the oppportunity, and have already begun making plans  to open new locations throughout the subcontinent at a rapid clip.

Rajan also wants to double the borrowing limits of banks and ease norms for non-resident bonds, which could inject as much as $30 billion into the Indian economy.

Fixing the Laws, Stopping Inflation

Second on Rajan’s docket after propping up the rupee is updating India’s outdated corporate laws and taming the rampant inflation India is currently experiencing. Right before taking Rajan took his place at the head of the central bank, the executive director of the Reserve Bank of India stressed the need for India to have efficient bankruptcy laws in the corporate bond market. Rajan further went on to curb bad loans by instituting a system that will track the credit history of borrowers, so banks will be less likely to give out shaky loans.

Inflation has beena major problem for India this year, and while growth in the country has slowed below five percent, the RBI is expected to cut interest rates and propel development.

While Rajan admits that he's coming into a diffcult situation with India, and these reforms are going to be diffcult for the country to simultaneously process, the alternative is continued stagnation. He's willing to take risks, even if his new policies alienate the old guard. But he doesn't seem to care one way or the other, saying "the governorship of the central bank is not meant to win one votes of Facebook 'likes.'"

Thisworld-famous economist claims he's not interested in winning any popularity contests. But if he can live up to expectations and return the third-largest economy in the world to its former glory he'll find himself very popular indeed, as the reformist who raised India's economy up to its true potential.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
IBN ICICI Bank Limited 7.98 0.09 1.14 5,885,110
RNOPF Renold Plc Ord 0.57 0.00 0.00 0

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