Raghuram Govind Rajan (born 3 February 1963) is an Indian economist currently serving as the 23rd Governor of the Reserve Bank of India, the central bank of India. He was chief economist at the International Monetary Fund from 2003 to 2007, the youngest to occupy the position. He was a professor of finance at the University of Chicago Booth School of Business from 1991 to 2013, when he went on public service leave. At the Federal Reserve annual Jackson Hole conference in 2005, Rajan warned about the growing risks in the financial system and proposed policies that would reduce such risks. Former U.S. Treasury Secretary Lawrence Summers called the warnings “misguided” and Rajan himself a “luddite”. However, following the 2008 economic crisis, Rajan’s views came to be seen as prescient and he was extensively interviewed for the Oscar winning documentary Inside Job (2010).
In 2003 Rajan received the inaugural Fischer Black Prize, given every two years by the American Finance Association to the financial economist younger than 40 who has made the most significant contribution to the theory and practice of finance. His book, Fault Lines: How Hidden Fractures Still Threaten the World Economy, won the Financial Times/Goldman Sachs Business Book of the Year award in 2010. He is recognized as one of the best central bank governors worldwide. Raghuram Rajan was born on 3 February 1963 in Bhopal, Madhya Pradesh into a Tamil Brahmin family. He is the third of four children of R Govindarajan, an Indian Police Service officer who topped his 1953 batch. Assigned to the Intelligence Bureau, R Govindarajan was posted to Indonesia in 1966. In 1968 he joined the newly created external intelligence unit of the Intelligence Bureau, the Research and Analysis Wing (R&AW) where he served as staff officer under spymaster R. N. Kao and became part of the “Kaoboys”. In 1970 he was posted to Sri Lanka, where Raghuram Rajan missed school one year because of political turmoil. After Sri Lanka, R Govindarajan was posted to Belgium where the children attended a French school. In 1974 the family returned to India. Throughout his childhood, Rajan presumed his father to be a diplomat since the family traveled on diplomatic passports. From 1974 to 1981 Rajan attended Delhi Public School, RK Puram, where he learnt Hindi for the first time. In 1981 he enrolled at Indian Institute of Technology, Delhi for a bachelor’s degree in electrical engineering. In the final year of his four-year degree, he headed the Student Affairs Council. He graduated in 1985 and was awarded the Director’s Gold Medal as the best all-round student. In 1987 he earned a Post Graduate Diploma in Business Administration from the Indian Institute of Management Ahmedabad where he was a gold medalist. After graduation he joined Tata Administrative Services as a management trainee but left after a few months to join the doctoral program in management at the MIT Sloan School of Management. In 1991 he received a PhD for his thesis titled Essays on Banking. Rajan’s research interests were in banking, corporate finance, and economic development, especially the role finance plays in it. In 1991 Rajan joined the Booth School of Business at the University of Chicago and went on to become a Professor of Finance there. In 2013 he taught an MBA course in international corporate finance and a PhD course in the theory of financial decisions.
From October 2003 to December 2006 he served as Chief Economist at the International Monetary Fund (IMF).
In November 2008, Indian Prime Minister Dr Manmohan Singh appointed Rajan as an honorary economic adviser. That same year, a high-level committee on financial reforms, headed by Rajan, submitted its final report to the Planning Commission. He chaired the Indian Government’s Committee on Financial Sector Reforms (2007-2008).
In 2009 he became a member of the American Academy of Arts and Sciences. In 2011 he served as President of the American Finance Association. In 2012 he became a member of the Group of Thirty.
On 10 August 2012 Rajan was appointed as chief economic adviser to India’s Ministry of Finance, replacing Kaushik Basu. He prepared the Economic Survey for India for the year 2012–13.
On 6 August 2013 it was announced that Rajan would take over as the next Reserve Bank of India Governor for a term of 3 years, succeeding Duvvuri Subbarao. On 5 September 2013 he took charge as the 23rd Governor of the Reserve Bank of India, at which point he took a leave of absence from the University of Chicago Booth School of Business.
In his first speech as RBI governor, Rajan promised banking reforms and eased curbs on foreign banking, following which the BSE SENSEX rose by 333 points or 1.83%. After his first day at office, the rupee rose 2.1% against the US dollar. As Governor of the RBI, Rajan made curbing inflation his primary focus, bringing down retail inflation from 9.8% in September 2013 to 3.78% in July 2015 – the lowest since the 1990s. Wholesale inflation came down from 6.1% in September 2013 to a historic low of -4.05% in July 2015. Under Rajan, the RBI adopted consumer price index (CPI) as the key indicator of inflation, which is the global norm, despite the government recommending otherwise. Foreign exchange reserves of India grew by about 30% to the tune of $380 billion in two years. Under Rajan, the RBI has licensed two universal banks and approved eleven payments banks to extend banking services to the nearly two-thirds of the population who are still deprived of banking facilities.
In 2014 it was suggested that Rajan could take over from Christine Lagarde as head of the IMF when her term expires in 2016.
On 9 November 2015, Rajan was appointed as Vice-Chairman of the Bank for International Settlements (BIS).
Economic and political views
Rajan advocates giving financial markets a greater role in the economy. In the book Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity co-authored with Luigi Zingales, the two authors argue in favour of deregulated financial markets in order to facilitate access of the poor to finance: “Capitalism, or more precisely, the free market system, is the most effective way to organise production and distribution that human beings have found … healthy and competitive financial markets are an extraordinarily effective tool in spreading opportunity and fighting poverty. …Without vibrant, innovative financial markets, economies would ossify and decline.”
In 2005, at a celebration honouring Alan Greenspan, who was about to retire as chairman of the US Federal Reserve, Rajan delivered a controversial paper that was critical of the financial sector. In that paper, “Has Financial Development Made the World Riskier?”, Rajan “argued that disaster might loom.” Rajan argued that financial sector managers were encouraged to “take risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time. These risks are known as tail risks. But perhaps the most important concern is whether banks will be able to provide liquidity to financial markets so that if the tail risk does materialise, financial positions can be unwound and losses allocated so that the consequences to the real economy are minimised.”
The response to Rajan’s paper at the time was negative. For example, former U.S. Treasury Secretary and former Harvard President Lawrence Summers called the warnings “misguided” and Rajan himself a “luddite”. However, following the 2008 economic crisis, Rajan’s views came to be seen as prescient; by January 2009, The Wall Street Journal proclaimed that now, “few are dismissing his ideas.” In fact, Rajan was extensively interviewed on the global crisis for the Academy Award winning documentary film Inside Job. Rajan wrote in May 2012 that the causes of the ongoing economic crisis in the US and Europe in the 2008–2012 period were substantially due to workforce competitiveness issues in the globalisation era, which politicians attempted to “paper-over” with easy credit. He proposed supply-side solutions of a long-term structural or national competitiveness nature: “The industrial countries should treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades… Rather than attempting to return to their artificially inflated GDP numbers from before the crisis, governments need to address the underlying flaws in their economies. In the United States, that means educating or retraining the workers who are falling behind, encouraging entrepreneurship and innovation, and harnessing the power of the financial sector to do good while preventing it from going off track. In southern Europe, by contrast, it means removing the regulations that protect firms and workers from competition and shrinking the government’s presence in a number of areas, in the process eliminating unnecessary, unproductive jobs.”
During May 2012, Rajan and Paul Krugman expressed alternate views on how to reinvigorate the economies in the US and Europe, with Krugman mentioning Rajan by name in an opinion editorial. In an article in Foreign Affairs magazine, Rajan had advocated structural or supply-side reforms to improve competitiveness of the workforce to better adapt to globalisation, while also supporting fiscal austerity measures (E.g., raising taxes and cutting spending). Rajan conceded that austerity could slow economies in the short-run and cause significant “pain” for certain constituencies. Krugman rejected this view, advocating instead traditional Keynesian fiscal stimulus (E.g., spending and investment) and monetary stimulus, arguing the primary factor slowing the developed economies was a general shortfall in demand across all sectors of the economy, not structural or supply-side factors that affected particular sectors. This debate occurred against the backdrop of a significant “austerity vs stimulus” debate occurring at the time, with some economists arguing one side or the other or a combination of both strategies.
In a 2014 interview, Rajan said his major targets as governor of the Reserve Bank of India were to lower inflation, increase savings and deepen financial markets, of which he believed reducing inflation was the most important. A panel he appointed proposed an inflation target for India of 6% for January 2016 and 4% (+-2%) thereafter.