‘Luddite’ to RBI

This is a fresh record low for the Indian rupee against the dollar.

This is India’s new central bank governor.

Sooo…. does Larry Summers still think Raghuram Rajan’s a luddite?

In any case, we should be in no doubt as to Raghuram Rajan’s forthrightness on the external shifts affecting India…

Rajan’s ProSyn profile is here — including this recent take on India’s growth slowdown — and he’s frequently graced the FT’s op-ed pages regarding what should constitute ‘credible’ central banking (examples here, here, and here).

Worth noting, since Rajan’s first job in September is probably going to involve casting an eye over policy tightening and the effects on Indian financial stability.

Some recent pointers from JPMorgan analysts:

It was clear that expectations were unhinged a month ago with the Rupee on an inexorable path of weakness. Obviously, policymakers are trying to rein in expectations by drawing a line in the sand. So even if the currency does not materially appreciate, but stabilizes at the current level and expectations get anchored, policymakers may view the moves as buying valuable time to solve the more fundamental BoP gap that exists.

More fundamentally, whether or not speculation is currently rampant, it is important for the central bank to take these measures to their logical conclusion to preserve credibility. If these moves are seen to fail, the Rupee could come under renewed pressure as markets would conclude that the policy resolve to anchor the currency is missing. For the sake of credibility, therefore, it’s important to stay the course.

If these measures stay beyond a few weeks they will undoubtedly have a collateral impact on growth. But growth would also be adversely impacted if the FX continues to weaken and inflation is pressured further, unhedged corporate balance sheets come under more stress, and the fiscal consolidation becomes more challenging. There are no easy options at the moment. But now that policymakers have picked one, they need to exercise it fully.

By David Keohane and Joseph Cotterill

Related links:
Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party – WSJ (2009)
Central bankers under siege – Raghuram Rajan