LSE alumnus Siddharth Ramalingam asks whether RBI Governor Raghuram Rajan will retain his current market appeal

Ramalingam, Siddharth

LSE Research Online

2013-10-30Reviewing the ‘Rajan effect’blogs.lse.ac.uk /southasia/2013/10/30/reviewing-the-rajan-effect/LSE alumnus Siddharth Ramalingam asks whether RBI Governor Raghuram Rajan will retain his currentmarket appeal.Much of the positivity surrounding Dr Raghuram Rajan is being ascribed to the ‘Rajan effect’. He certainly has thepedigree—he studied at top Indian and international institutions; was the chief economist of the InternationalMonetary Fund; was prescient of the financial crisis; and has authored what some might say is the authoritativebook on what ails the financial sector. Rajan is also good at engaging the media and is widely perceived asunderstanding how global markets work. Not surprisingly, there was much cheer when his appointment as thetwenty-third governor of the Reserve Bank of India was announced. But it remains to be seen whether Rajan willsurvive his tenure as the chief of the central bank with this reputation intact. A few months into his new job, it is worthreviewing what he has done right, and what has simply worked in his favour.Although Rajan stated quite clearly in his first speech as the governor that his job was about hard decisions, notpopular ones, few believed that he would follow through and raise interest rates as quickly as he has (if at all). Nowthat the interest rate has been raised, markets seem to have factored in at least one more interest rate hike withoutmuch fuss. While a case for further interest rate hikes can be made, it is surprising to see the market assume that afurther hike under Rajan’s watch is not a bad thing. No doubt, Rajan enjoys unprecedented market credibility, and issaying things the right way.Popular opinion also holds that the ‘Rajan effect’ played a significant role in the recovery of the rupee over the lastfew weeks. Arvind Subramanian clearly explains how this is far from the truth. While it is true that there was animprovement in the rupee the day Rajan took charge, and that the rupee has been on an upward trajectory since,the reasons for the rupee’s recovery are far more complex.1/2As Subramanian points out, external events drove the rise of the rupee. It is also now well known that one of themain contributors to the rupee’s decline was an external event—the US Federal Reserve announcement that it couldstart winding down its monetary stimulus programme earlier than previously expected. That this is the case is borneout by the rupee’s recovery since August, when doubts regarding the tapering of the Fed’s stimulus eased. Furthertestament to this logic is the fact that the currencies of the five major emerging markets exhibit a similar trend. Therereally isn’t much Rajan could have done to significantly alter how the rupee fared in the weeks after he took office.Rajan’s ascent to the helm of the central bank could not have been worse in terms of timing—he faces a weakenedrupee, challenging macroeconomic conditions, faltering domestic growth, and a profligate government in electionmode. For now, it would be apt for Rajan to recall Warren Buffett’s quote: “when a management with a reputation forbrilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remainsintact.” It is likely that the ‘Rajan effect’ will fade over time, but there is still hope that the new RBI governor will builda legacy for himself that will surpass his current image.About the AuthorSiddharth Ramalingam is Senior Vice President at IDFC and Director, The Minds Foundation. He completed anMSc in Political Theory at LSE in 2007. The opinions expressed in this post are personal.Copyright © 2016 London School of Economics2/2

Reviewing the ‘Rajan effect’

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