Raghuram Rajan has to revive a patient whose vital signs are sinking

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Raghuram Rajan has to revive a patient whose vital signs are
Elevated inflation, sinking rupee, QE3 tapering fears, 4 year low growth rates and daily threats of sovereign rating downgrades are only some of the problems that welcome Raghuram Rajan, the new Governor of the Reserve Bank of India (RBI).

Of course, all of these are not the RBI's problems, but, it will have to work closely with the government, to pull India from the brink.

September - a test of nerves

The month of September is rather ominous. It begins with a possible military strike on Syria, which would once again send oil into a tizzy and the rupee into a tailspin, unless of course the RBI intervenes massively to sells dollars again. Come September 19, there would be a Fed decision on QE 3 tapering again bringing volatility in the currency markets and paving the way for the RBI's decision on its monetary policy, possibly the next day.

Analysts would closely watch the statements of Rajan in the RBI's Monetary policy that he would unveil possibly on September 20. It would be a strange predicament for the new Governor on this day. Would he defend the rupee, push growth or battle inflation. Economists and markets no that it's virtually impossible to do all three together.

The bigger problems

But, that's just the problems for September. In the short to medium term, he has to battle growth rates that have hit a 4-year low and keep falling lower and CPI inflation that remain stubbornly high. That's where the problems lies. The consumer price inflation is already in double digits and with a possible diesel price hike, inflation is likely to rise, leaving very limited scope for the RBI to cut interest rates.

On the other hand if the RBI decides against cutting interest rates, it's likely to ensure that growth rates slip even below the 4.4% mark achieved for the quarter ending June 30, 2013.

Inflation and GDP growth apart the biggest problem is the falling rupee. With the Fed Reserve likely to taper off QE3, there is likely to be less FII inflow and possibly some exit from foreign funds that will add to pressure on the rupee.

Falling rupee and falling growth, along with a elevated inflation is a perfect recipe for a ratings downgrade. Clearly, new RBI Governor Raghuram Rajan has to perform an urgent surgery - "band aid measures" on a wounded Asian tiger just want work.


Read more about: rbi, inflation, qe3, raguram rajan
Story first published: Thursday, September 5, 2013, 8:39 [IST]
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