India's new central bank chief warns of unpopular steps to fight crisis

Top economist Raghuram Rajan warned Wednesday he may have to take unpopular steps to tackle India's worst economic crisis in decades as he took over as the central bank's new chief. Rajan, a former International Monetary Fund chief economist, sought to reassure rattled markets, saying India faced tough challenges but its economy was "fundamentally sound," as policymakers battle a plummeting rupee and decade-low growth. In his first public remarks after taking over as Reserve Bank of India (RBI) governor earlier Wednesday, Rajan added that "some of the actions I take will not be popular." "The governorship of the central bank is not meant to win one votes or Facebook 'likes.' But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism," he said. Rajan, famed for forecasting the 2008 global financial crisis, takes over from retiring Duvvuri Subbarao, as India's once-booming economy is caught in a quagmire of sharply slowing growth, high inflation, a record current account deficit and sliding currency. Some analysts fear Asia's third-largest economy could be heading for a meltdown with the rupee down around 17 percent against the dollar this year. In a wide-ranging speech, Rajan stressed he would hew to the RBI's mandate of "securing monetary stability" and sustaining confidence in the value of the country's money, which means "low and stable inflation." Rajan, who left his post as a professor at the prestigious University of Chicago's Booth School of Business and returned to India last year to become an adviser to Premier Manmohan Singh, added the RBI must be a "beacon of responsibility." At the same time, he stressed India needed "faster, broad-based inclusive growth leading to a rapid fall in poverty." As part of measures to attract vital foreign investment, he said policymakers "will steadily but surely liberalise our markets" -- a step seen as contentious in some political, especially left-wing, circles. "Better that investors take positions domestically and provide depth and profits to our economy than they take our markets to foreign shores," he said. Analysts were impressed by Rajan's inaugural statements. "With Rajan one has very high expectations. Nevertheless, he surpassed all expectations by miles," Siddhartha Sanyal, Barclays Capital economist, told AFP. He said Rajan's words should provide "a degree of confidence and hope to markets." Rajan added the central bank would speed up "financial inclusion" by making it possible to open more bank branches. Some 480 million of India's 1.2 billion people, mostly living in the country's 630,000 villages, have no banking access, according to the RBI. Subbarao said earlier Wednesday that Rajan was in for a bumpy ride with an economy that grew at a decade low of five percent in the last financial year -- way below the near double-digit levels notched up during the heady noughties. But he said India "could not have asked for a more capable person to lead the RBI in these most difficult times." Rajan voiced concern about the impact of bad debts on bank balance sheets due to the slowdown and said he would encourage banks to clean up loan portfolios. "The bad loan problem is not alarming yet, but it will only fester and grow if left unaddressed. Abheek Barua, chief economist with HDFC Bank, called Rajan "more innovative" than Subbarao and added he expected him to "be more aggressive." The RBI has introduced a series of recent measures to try to halt the rupee's slide, raising short-term interest rates and tightening cash in the system. The currency ended the day slightly firmer at 67.08 rupees to the dollar, helped by suspected heavy intervention by the central bank, dealers said. Shares closed up nearly two percent at 18,567 after analysts said the market was oversold. The currency has been forecast by Goldman Sachs to fall to 72 to the dollar in coming months. A depreciating rupee makes imports of everything from oil to chemicals costlier, and comes as foreign capital inflows into India have been drying up and the government is trying to plug its gaping current account deficit. Analysts have raised fears India could face a crunch of the sort it suffered in 1991, when a foreign exchange-strapped government pawned gold for an IMF bailout. The government is desperate to kickstart growth before elections due by May. The RBI has come under pressure to cut rates to boost growth but such a move could fuel already high inflation.