RBI Governor Rajan: India isn’t in danger of crisis

The new governor of the Reserve Bank of India, Raghuram Rajan, told the BBC in his first international interview that India has enough foreign-exchange reserves to safeguard against a repeat of the 1991 balance of payments crisis.

Rajan said that India has enough money to pay for all of its short-term debts tomorrow if it needed to, as it has reserves that are equal to 15% of GDP. This is a key difference from two decades ago when the country was rescued by the IMF.

He said that a country with $280bn (£175bn) in reserves can finance itself, and points out that India’s external debt is about 22% of GDP. He said that very few countries with such low level of debt have had an external crisis. Rajan was also said anyone who suggests that India should seek IMF assistance should know that there will be “no IMF, it’s not going to happen”. And that India is a creditor to the IMF.

He also points out that the current account and fiscal deficits are falling, which are the sources of concern and why some investors had left the country. It had resulted in the rupee hitting an all-time low shortly before Rajan took office in early September. Since then, markets have risen strongly and the rupee has strengthened and is now approaching 60 rupees to the US dollar, leading what’s been dubbed the Rajan rally.

Quite unusually for a central banker, Rajan also revealed that although he tries not to comment on the appropriate level of the rupee as he “knows when it has gone too far”. In his opinion, 68 rupees per US dollar that was hit at the end of August was “too weak”, while 50 is probably “too strong” relative to the fundamentals of the economy.

In terms of getting the balance right between fighting inflation and supporting economic growth, Rajan describes the process as “muddling through”.

He sees the challenge of inflation, especially for food, as stemming from the growing demand of a population that is getting richer and demanding more foodstuffs while supply lags behind. He explained that this is why he has raised rates twice in his first two months in office, which is to reduce demand a little bit to control inflation while production catches up.

Of course, to encourage more production in India will require investment. Rajan recognises this as a structural challenge for India. For a country at this level of development, manufacturing is a much smaller part of the economy as compared with services, which are about 60%.

He sees four impediments to India growing its manufacturing sector, which are infrastructure, education, regulation, and access to finance. He said that the central bank governor can only affect access to finance. Thus Rajan acknowledges that there is a limit to what central bankers can do, but stresses that there are other “rock stars” in the Indian government that are taking their agreed reform plans forward.

Rajan also gave a timeframe for achieving his “five pillars” that is to improve the monetary policy framework, reform the banking system, liberalise financial markets, increase financial inclusion, and sort out financially distressed institutions. Mr Rajan says that he has a five-year timetable to achieve these aims and changing the financial sector will help India to grow.