Another Graduate

Yet another central bank is now being governed by a PHD graduate (in Management) from MIT. Raghuram Rajan, a former chief economist at the International Monetary Fund, this month became the 23rd Governor of the Reserve Bank of India, that country's central bank. (Two other current world central bankers are also MIT PHD graduates - Fed Chairman Ben Bernanke, who graduated in 1979, and European Central Bank Governor Mario Draghi, who graduated in 1977.)

Just as Chairman Bernanke surprised markets on Wednesday by doing nothing, so has Governor Rajan, by doing something not just unexpected but, in his very first monetary action, bold as well. He announced today an increase in the repurchase rate of a quarter point, to 7.5%,, despite an Indian economy that is exhibiting the weakest growth since 2009 (estimated at some 4% this year compared to the past decade's annual average of 8%), and even after the Fed's decision this week to continue monetary stimulus had already eased pressure on the rupee, which had been plunging since May. By raising rates, Governor Rajan has a single purpose - to send a clear signal that he intends to reign in the 9.6% consumer-price inflation that has continued to accelerate. The Governor is only too well aware that India is facing a full-blown balance of payments crisis; its current account deficit is one of the highest in the world, the equivalent of 4.5% of its GDP, and capital flight is exacerbating its financing. The country's budget deficit is similarly huge, amounting to some 5% of GDP. Countless times, in many countries, over many years, this has typically been the point at which the IMF has to be summoned for an emergency bail-out loan that is accompanied by a package of austerity measures.

So, like his fellow MIT alumni in Washington and Frankfurt, India's new central bank governor will have a busy schedule over the next several months. Another hike in interest rates may be required, especially since Prime Minister Singh's government, hobbled by graft scandals and facing re-election in May 2014, may be unwilling to introduce supportive fiscal measures to reduce the budget deficit. Governor Rajan's announcement today is having its intended effect; the rupee is stabilizing, albeit at a nearly all-time low of 62 to the US dollar, compared with 55 a year ago and 45 a decade ago.

No doubt the Governor will be consulting, at least privately, with his MIT alumni Governors as he works to right an economy gone very wrong.