“I would not use the words ‘crisis’ and ‘India’ in the same breath, other than in this sentence,” Reserve Bank of India Governor Raghuram Rajan told journalists during his first press conference on Wednesday.

Clearly, the markets are listening — and absorbing — the new Governor’s confidence. The rupee on Friday staged its strongest recovery in two weeks, gaining 1.2 per cent to close at Rs 65.24/25 to the dollar, on top of the 1.6-per cent gain notched up on Thursday.

The ‘Rajan effect’ was at work in the equity market too. The BSE Sensex climbed back past the 19,000-point mark on Friday, up 1.53 per cent, or 290.30 points. This was its third consecutive gaining session, and Friday’s close of 19,270.06 points, its highest since August 14.

So does this mean that the worst is over for the rupee and the economy? Have Rajan’s moves to curb volatility and boost dollar inflows managed to solve the problem?

Initial package

Rajan himself doesn’t think so. His measures, he said, should be seen as a “big initial package or a down payment.”

What he didn’t say, but economists are saying instead, is that the real job of restoring growth, curbing the fiscal deficit and getting foreign investors to put more money into India needs to be done by the government, not the RBI.

“The RBI and Central Government need to work in parallel to stabilise the slowing economy growth,” the research team at India Forex Advisors said, “otherwise all the efforts taken by Raguram Rajan would end up in vain.”

The Government says it is determined not to let that happen. With the passage of key pieces of legislation such as the Pension Bill and the new Land Acquisition Act, the process of structural reforms has gathered momentum.

“Though structural reform measures will give the real result only after some time, when these things are seen to be getting going, they have a good impact on the sentiments,” said a senior Finance Ministry mandarin involved in formulating policy.

10-point agenda

The official said the government is also determined to implement the 10-point agenda that Finance Minister P. Chidambaram unveiled in Parliament. This agenda includes resolving the judicial impasse on iron ore and coal mining, a commitment to keep the fiscal deficit for the current fiscal at 4.8 per cent of GDP, containing the current account deficit at $70 billion, re-capitalising public sector banks, speeding up investments by public sector enterprises and encouraging manufacturing and export. “You will see action in coming weeks and not in months,” the official promised.

The market wants to see more concrete action to curb rising fuel subsidy, and some concrete plans to incentivise exports, which have been given an unexpected advantage by the falling rupee. “Higher exports would simultaneously dampen the merchandise trade deficit and boost economic growth impulses, at a relatively small fiscal cost,” Aditi Nayar, senior economist with ICRA, said.

Sunil Sinha, Director of India Ratings, said: “Quick implementation of reform Bills such as pension and land legislation will be key. Living in uncertainty is worst than certainty with cost increase.”

(This article was published on September 6, 2013)
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