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RBI has traditionally fought for status quo. India is at a juncture when more of the same policy won't help
Raghuram Rajan's appointment as RBI governor breaks with the tradition of appointing bureaucrats with little expertise in modern finance or monetary economics to the RBI's top job. Arguably, an academic can bring out of the box perspective, explore policy choices that move away from the well-worn path. Ben Bernanke, for instance, played a crucial part in nudging the Fed towards the policy of quantitative easing to pull the US economy out of a recession when interest rates had hit zero and there seemed to be no way of achieving monetary easing.
The biggest challenge for Rajan an economist trained in modern finance, who has worked on policy problems of the Indian financial sector will be macroeconomic management. Monetary policy and its trade-offs will continue to present intractable challenges in the next three years. There is, as Rajan says, no magic wand to spur growth, push inflation and the CAD down, shore up investment or strengthen the rupee. There will be difficult choices and, undoubtedly, Rajan will face political pressures. On the one hand, there is the option of reducing interest rates to encourage growth and investment. On the other hand, an easier monetary policy could put pressure on the rupee to depreciate. Unless the government does its share on the fiscal and reform front, it will not be possible for the RBI to manage growth, inflation and the rupee.