Who Is Raghuram Rajan?

Raghuram Rajan is India's first celebrity central bank governor.It is widely known that he was the chief economist of the IMF, and one of the many economists who predicted the global economic recession. Many believe that he may win the Nobel Prize in Economics one day.

Rajan, the 23rd governor of the Reserve Bank Of India (RBI) , is an internationally respected economist, while many of his predecessors were Indian Administrative Service (IAS) officers.  Raghuram Rajan was a Gold medalist at IIT Delhi and IIM Ahmedabad, and has a PhD in Management from the MIT Sloan School of Management for his thesis on banking. From 2003 to 2006, Rajan was the youngest chief economist in history of the International Monetary Fund (IMF) . In 2008, the draft report Raghuram Rajan committee submitted on financial sector reforms in India was very well-written. It was a major contribution to the body of work on monetary and financial reforms in India.

Raghuram Rajan warned of the impending financial crisis in 2005, during a celebration of the United States Federal Reserve Chairman Alan Greenspan's career. His views were summarily dismissed by many eminent economists, but his fundamental outlook is now shared by the finest of minds:

"It is unfair to pin the blame of financial crisis solely on greedy Wall Street bankers. A disaster of such a large scale cannot be traced back to a group of individuals. There is plenty of blame to go around. Politicians, regulators, Wall Street bankers, and the general public cannot easily wash their hands of the crisis."

Raghuram Rajan pointed out that when the US Fed cut interest rates sharply, more consumers were investing in residential property, raising property prices and investment in the sector. The additional demand due to low interest rates can largely be attributed to households with low credit ratings and poor credit history. As home prices rose, borrowers could avoid default, allowing them to forget the need to repay their loans. Even when the crisis happened, the government raises spending and kept interest rates low. Wall Street banks felt that the Federal Reserve would keep the interest rates low, allowing them to borrow cheaply. As Rajan wrote, "We miss the point if we find a scapegoat in the financial sector. It was doing what so many people wanted. And not many people were asking questions."

It is in the context of Rajan's views on the sub-prime mortgage crisis of 2008 that home buyers in India should look at Rajan's actions as a governor. Raghuram Rajan, as the RBI governor, did not cut the interest rates from September 2013 to January 2015. In this period, he raised the repo rate by 75 basis points. But, in the past nine months, Rajan cut the repo rate by 75 basis points.

As the unsold inventory in residential real estate in India in huge, Rajan proposed two measures that would allow consumers to buy homes. 1) When banks cut home loan interest rates, the cost of borrowing would decline. Many more people would be willing to buy homes. Rajan had repeatedly urged banks to cut interest rates, and banks have listened to him, though he was not satisfied with the extent to which interest rates were cut. 2) Real estate developers should lower home prices to sell off their unsold stock. Real estate developers have replied to it pointing out that prices cannot go down any further.

Even though economists had expect Rajan to cut the repo rate in August, he said that the RBI will wait till the common man expects prices to remain stable. But, many economists expect Rajan to cut the repo rate in the September 29 monetary policy review. In a Reuters Poll, 44 of 51 economists polled said that he would cut the repo rate.