“It is the chair [of the RBI Governor] which is the prime driver, not who employs you”, he said.
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Stocks and rupee on Monday took an early morning plunge on Rajan’s no to a second term, but soon recouped their losses on hectic buying by some institutions and soothing voices from rating agency Fitch as well as some prominent marketmen, while fading Brexit worry helped too.
For Bhanu Baweja, strategist at UBS, Rajan’s departure might reflect pressure to maintain cyclical growth at the cost of giving up structural improvements.
Besides, he has also been often praised for containing inflation to a large extent and for forcing the banks to do a “deep surgery” to clean up their books of bad loans.
Rajan assumed office in September 2013 in the midst of a crisis for the Indian economy. With his bold policy initiatives, Rajan had garnered support in both domestic and worldwide markets. This is short-sighted, for when global inflation picks up, WPI could well exceed CPI.
In regional markets, Hong Kong’s Hang Seng was up 1.10 per cent, Shanghai Composite fell 0.17 per cent in early trade while Japan’s Nikkei was trading in the positive zone. Many economists say they feel that the change, which was adopted by the bank, more accurately reflected domestic inflation. It had closed at 7.50 percent on Friday.
The majority of candidates under consideration to replace Governor Raghuram Rajan appears to have a neutral-to-dovish bent, said Nomura.
Although Rajan still has until September to lead the RBI, the search for a new governor has already begun.
Another senior official said Rajan’s criticism of rising intolerance in India was seen as direct interference in politics, complicating a decision on whether to re-appoint him. “The poor will not suffer disproportionately due to bouts of sharp inflation, and the middle class will not see its savings eroded”, Rajan said. Listing the long-term benefits of a low-inflationary economy, the Governor said a stable rupee can increase investors confidence in our monetary policy goals, foreign capital inflows will be more reliable and increase in the longer maturity buckets, including in rupee investments. “In the current political context, this may actually reduce the RBI’s independence – suggesting that the convergence toward price stability we mentioned in our recent analysis may be premature”.
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Analysts say the new governor would need to be a deft manager of currency markets, as India is bracing for about $20 billion in outflows starting in September as dollar-term deposits raised from citizens overseas during a currency crisis in 2013 mature. “If the new governor is able to strike a right balance between the two then he will gain credibility and market focus is likely to shift back to improved macro fundamentals”.
