You cut the deficit, I’ll cut rates

RAGHURAM RAJAN need not even leave his office atop the Reserve Bank of India’s (RBI) tower in Mumbai to gauge two factors central to India’s prosperity. Looking down, the ships sailing to nearby docks provide clues as to the buoyancy of foreign trade: the imposition of steel tariffs earlier this year, a knock-on effect from China’s slowdown, all but stopped traffic for a time, he notes. Looking up, the skies also offer troubling portents. Mumbai should have been drenched by seasonal rain for over a week by now. The belated onset of the monsoon has already pushed up food prices, hampering the central bank’s crusade against inflation.

Indian policymakers have no control over the weather or the health of the global economy. But they can eliminate a third source of concern. Mr Rajan’s three-year term expires in September, but the government has prevaricated about granting him a second one. Both locals and foreign investors are wondering whether they are dealing with a lame-duck central banker. The rupee has gyrated, bond investors have quailed and tongues have wagged despite the...Continue reading