Why India's economy is better than it looks !

India has several problems but an impending economic crisis isn't one of them, the country's top central banker said emphatically Thursday.

"There's no way we are close to being a country in financial or economic crisis," Reserve Bank of India Governor Raghuram Rajan told CNNi's Richard Quest. "There's not a chance we will go to the IMF for money in the next 5 years."

The comments came at CNN's Debate on the Global Economy, an event held in conjunction with the World Bank and International Monetary Fund's annual meeting in Washington D.C.

Other panelists included IMF Managing Director Christine Lagarde, People's Bank of China Deputy Governor Gang Yi, Spain's Minister of Economy and Competitiveness Luis de Guindos and Chairman of President Obama's Council of Economic Advisers Jason Furman.

Rajan, who formerly served as head of the IMF, has faced a difficult task since being named India's top central banker in September: How to tame rampant inflation, without depressing economic growth even further.

Rajan's first attempt at a solution -- to hike interest rates -- shocked Indian markets three weeks ago.

"Inflation has been too high," he told Quest. "We have to combat it."

The rupee has been weakening against the U.S. dollar since the Federal Reserve started hinting it might slow its bond-buying program later this year.

The weaker currency makes it more expensive for India to import fuel, which trickles down to other prices making necessities like food more expensive.

Rajan warned that "easy money" created by the Fed's stimulus policies is large part of the problem. He described unhealthy investment cycles, in which cheap money from developed countries flows into emerging economies, which then go into distress and push the money back to industrial countries. This cycle is now on its third rendition, he said.

"Easy money is part of our problem," Rajan said. "How do we stop this flow, which creates problems again, and again, and again?"

Rajan also spoke about India's "perception problem" as the emerging economy has slowed from a rapid 10% growth rate just three years ago, to a mere 4.4% growth rate in the second quarter this year.

India's growth may have slowed, but it still holds very large U.S. dollar reserves, and is also far less indebted than other major nations, he said.

"We need to bring back growth now. But we're still doing better than a significant number of economies in the world," he said.

The U.S. economy, for example, will be lucky if it grows between 2% and 3% this year, according to most projections.

All the panelists voiced concerns about the debt ceiling debate in the U.S. but said they were confident Congress and President Obama would reach an agreement soon to avoid a default on the country's debt.

"We do have faith. I hope we won't be let down," Lagarde said.

Earlier Thursday, House Republican leaders said they will propose a temporary 6-week increase in the nation's borrowing limit. 

 India shocks markets with rate hike

The bold move, which increased the key rate to 7.5%, was made at the first policy meeting presided over by new Reserve Bank of India governor, Raghuram Rajan.

He also announced the scaling back of some emergency monetary measures introduced a few months ago with the aim of supporting the falling rupee as investors fled from emerging markets.

The capital flight was triggered by expectations that the U.S. Federal Reserve would start to wind down its massive stimulus program, spelling trouble for theglobal recovery.

Investors responded poorly Friday, sending Mumbai's Sensex index down more than 2% after the announcement. The rupee weakened against the dollar.

The policy moves reflect the dilemma Rajan faces in trying to prevent inflation spiraling out of control without damaging efforts to revive India's sluggish growth.

Rajan said the Fed's decision this week to keep pumping money into markets at current rates had bought India some time to put its economy in order.

"We must use this time to create a bulletproof national balance sheet and growth agenda, which creates confidence in citizens and investors alike," he said.

Rajan, who took up his post as central bank governor earlier this month, is challenged with boosting India's economy amid sky-high inflation, a rapidly weakening rupee, increased borrowing costs, a faltering stock market and its slowest economic growth in a decade.

India is also particularly vulnerable due to its $88 billion current account deficit, which reflects the nation's tendency to import many more goods than it exports and leaves it heavily reliant on foreign capital.

But Rajan isn't wasting any time. In his first day on the job, he announced reforms that should make it much easier for new banks to be licensed. He also took steps to support the rupee, including a new central bank facility to encourage commercial banks to accept more deposits from overseas.

The former chief economist at the International Monetary Fund seems undeterred by the challenges he faces, and has said he isn't afraid of making difficult choices.

"Some of the actions I take will not be popular. The governorship of the central bank is not meant to win one votes or Facebook likes," he said.

Trial by fire for India's new central banker

Into this mess steps Raghuram Rajan, a University of Chicago professor and fledgling media star who this week assumed the top spot at the Reserve Bank of India.

Rajan is best known for predicting an impending financial crisis during a 2005 gathering of prominent economists in Jackson Hole. The event was meant to honor former Fed chairman Alan Greenspan, who listened as Rajan argued that the exotic financial instruments championed by Greenspan had made economies unsafe.

Rajan, who delivered his first address as India's central banker on Wednesday, will need similar courage and foresight in his new job. Many of India's problems are outside the purview of the central bank, and the country's fractured political class is unlikely to legislate any meaningful reforms with an election looming next year.

The result could be an attempt by Rajan to forge a new, more unconventional path for the central bank.

"Any entrant to the central bank governorship probably starts at the height of their popularity," Rajan said Wednesday. "Some of the actions I take will not be popular. The governorship of the central bank is not meant to win one votes or Facebook likes."

Rajan is not wasting any time. In his first day on the job, Rajan announced reforms that should make it much easier for new banks to be licensed. He also took steps to support the rupee, including a new central bank facility to encourage commercial banks to accept more deposits from overseas.

Investors appear impressed, for now. Mumbai's Sensex index gained 2% and the rupee clawed back some lost ground.

But Rajan's next choices could be more fraught. The central bank could hike interest rates to fight inflation, but too sharp a move would raise borrowing costs for businesses and risk angering the ruling political party.

"The government is extremely unlikely to countenance a significant rise in the benchmark interest rate as a means of supporting the rupee, given the negative implications that would have for the real economy and for the electoral prospects of the ruling coalition," said Anjalika Bardalai, a senior analyst at Eurasia Group.

                                                                                        Courtesy : CNN-IBN