The Centre will name the next RBI governor before Raghuram Rajan demits office on September 4 and the selection will be made from among a few probables the Modi government is believed to have zeroed in on.
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Dr Rajan enjoys a mass appeal not normally associated with a banker, and has been dubbed “Rock star Rajan” and India’s “James Bond”. “A decision not to renew Rajan would create a lot of unhelpful noise.it would be a negative for the currency but an initial positive for the stock market since it would mean easier monetary policy”, said Christopher Wood of CLSA.
BJP leader Subramanian Swamy launched a vigorous campaign demanding the removal of Rajan.
However, a part of the industry – particularly real estate players – as well as the sections of the government felt that Rajan was too “tough” in managing inflation.
Rajan, a former chief economist at the International Monetary Fund who famously predicted the 2008 global financial crisis, is held in high esteem by policymakers and investors at home and overseas for overhauling the way the Reserve Bank of India (RBI) operates.
This observation comes not just a couple of days after Rajan formally said he was not interested in a second term as the governor of the Reserve Bank of India, but also a fortnight since Fitch was approached by the Ministry of Finance for a sovereign ratings upgrade.
“The RBI always sets the policy rate as low as it can, consistent with meeting its inflation objective”, he said, adding: “The RBI does not focus on inflation to the exclusion of growth”.
People in the government and industry had complained about Rajan’s obstinacy in not reducing interest rates, especially when the oil import bill was low and other macro-economic indicators were suitable.
Mr. Jaitley said on Saturday that a decision on Mr. Rajan’s successor “would be announced shortly”.
While there had been some speculation Rajan might not stay for a second term – dubbed “Rexit” in a nod to Britain’s vote on European Union membership – government officials said they were surprised by the timing and manner of the announcement.
In the only reference to his stepping down, he said that he hopes his successor will “internalise” the current framework and maintain the low-inflation outlook for the country. This will expand the pool of capital available for our banks and corporations. There is a strong view in the government that the RBI has been “behind the curve” in reducing interest rates and this has hurt the SME sector and higher rates were more beneficial to foreign institutional investors rather than the domestic market.
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Yesterday, he accused Mr Rajan of holding back the economy, saying: “It was nearly as if he was inspired to prevent the growth story from taking off”.
