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India's faith in central bank governer Rajan was too much- James Saft

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September 7
1:41 PM 2013

Reuters columnist James Saft pointed out in his recent post that much of India, including the economy, has been putting too much faith in new Indian central bank head Raghuram Rajan. He wrote that hopes were so high that the former International Monetary Fund (INF) chief economist was expected to single-handedly revive the Indian rupee.

Rajan's appointment to the central bank had allowed the new governor to present a series of measures that were said to be clever and far-sighted. One of the measures that has made an immediate impact was allowing banks at the central bank to have acess to preferential swap rates.

Reception to Rajan's proposal saw the banks share rally to 9%, Bombay Stock Exchange Sensex rise 2.2% and finally, the rupee to gain as much as 2.3%.

However, Saft stressed that India needs to do a deep reform to reduce impact of the upcoming tapering of bond purchase by the US Federal Reserve.

Saft indicated that the Indian economy, once US decides to restrict its bonds purchases, would be experiencing the same thing also happening now in the US. "Fed by credit and asset inflation under Greenspan, the U.S. failed to reckon with the hollowing out of its middle class, creating instead an economy too dependent on real estate jobs for those with fewer skills, and financial intermediation jobs for those with more. Similarly, Bernanke's creative work during the crisis has allowed the U.S. to more painlessly avoid reforming its financial system," he wrote. 

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