In his inauguration speech as the new head of the Reserve Bank of India, Raghuram Rajan said the governorship “is not meant to win . . . Facebook likes”. Still, investors raised their thumbs to the measures the new governor announced as he sought to restore confidence in India’s embattled currency. After months of free fall, the rupee rose steeply against the dollar. Shares in the Mumbai Sensex index also rallied sharply.
Investors’ euphoria is, in part, a vote of confidence in Mr Rajan. In his speech yesterday the new governor did not make substantial statements on monetary policy, holding fire until after the US Federal Reserve’s Open Market Committee’s mid-September meeting. This makes sense, as any Fed announcement on a possible monetary tightening could have a momentous impact on the rupee.
Mr Rajan, however, is not sitting on his hands. He wants to lure in capital inflows by letting banks borrow more from abroad. He is also encouraging lenders that receive dollar deposits from Indians abroad to swap them into rupees, by offering a subsidised currency hedge. But while these measures should help fund India’s growing current account deficit, they are not riskless. The banks or the RBI would be exposed to potentially heavy losses were the rupee to depreciate further.