Raghuram Rajan says no to second stint at RBI
Buffeted by political attacks and unending speculation over his continuance, RBI governor Raghuram Rajan on Saturday said no to a second term in the post, a surprise decision that industry and Opposition parties termed as the nation’s loss.
Ruing that his work on containing inflation and cleaning up the books of the banks was “yet to be completed”, Dr Rajan said, “While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as governor ends on September 4, 2016.”
Speculation has been rife over whether Dr Rajan, a former IMF chief economist known to have predicted the 2008 global financial crisis, would get a second term after BJP leader Subramanian Swamy launched a no-holds-barred attack on him recently and accused him of destroying the economy with his hawkish stance on interest rates. Dr Swamy had also questioned whether Dr Rajan was “mentally fully Indian” and alleged that he holds a US Green Card.
Dr Rajan, 53, who took charge as RBI governor in September 2013 with a three-year term, had also ruffled feathers in the saffron camp with his outspoken views on issues like intolerance and his remarks about India being a “one-eyed king in the land of the blind”.
While Union finance minister Arun Jaitley called for restraint in public criticism in the wake of Dr Swamy’s attacks, BJP president Amit Shah said the newly-nominated MP’s remarks were his personal opinion. Answering questions on another term for Dr Rajan, Prime Minister Narendra Modi had said that this “administrative subject” should not be an issue of interest to the media and that it would “come up only in September”.
In his letter to colleagues, Dr Rajan, appointed by the previous UPA government, said he “will, of course, always be available to serve my country when needed”.
The decision by Dr Rajan, who was called a “rock star central banker”, immediately set off speculation about his successor and the impact it could have on stock and bond markets when they open on Monday morning.
Mr Jaitley, who had earlier steadfastly refused to discuss in public the issue of a second term for Dr Rajan, welcomed his decision, saying he respects it and that the government appreciates his good work. A decision on a successor to Dr Rajan would be announced shortly, he said.
Mr P. Chidambaram, during whose term as finance minister Dr Rajan was appointed, said, “I am disappointed and profoundly saddened by the decision of Dr Raghuram Rajan to leave the RBI on completion of his term on September 4, 2016, but I hasten to add that I am not surprised at all.” The senior Congress leader said the government had invited this development through a craftily-planned campaign of insinuations, baseless allegations and puerile attacks on a distinguished academic and economist.
“As I had said sometime ago, this government did not deserve Dr Rajan. Nevertheless, India is the loser,” he added.
Top industry leaders, including Anand Mahindra, Deepak Parekh, N.R. Narayana Murthy, Kiran Mazumdar-Shaw and Mohandas Pai, said Dr Rajan’s departure would be the “nation’s loss” as he brought economic stability and enhanced India’s credibility on the world stage.
Surprisingly, there were no comments from industry chambers like CII and FICCI.
There have been concerns that Dr Rajan’s exit, which has been termed as “Rexit”, could lead to an adverse impact on the country’s financial markets.
While the governor did not specifically refer to this, he said in his letter that the RBI would be able to “ride out imminent sources of market volatility, like the threat of Brexit.” He also said that the RBI has “made adequate preparations for the repayment of Foreign Currency Non-Resident (B) deposits, and their outflow, managed properly, should largely be a non-event”, referring to concerns that the maturity of these bonds in September-October could impact the markets in terms of sudden pressure on the country’s forex reserves.
Dr Rajan has been generally hailed by industry and experts, but has been under attack from some, including Dr Swamy and a few other leaders, for what they term his failure to contain inflation and lower interest rates to boost the economy.
The governor said he is confident that his successor would take the RBI to new heights. “I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three-year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished. While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed,” he said. “Moreover, the bank cleanup initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term. Colleagues, we have worked with the government over the last three years to create a platform of macroeconomic and institutional stability,” he added.
In his message, Dr Rajan reflected on his three years at the helm of the central bank, tracing the journey from taking over the governorship in 2013 under difficult circumstances, when the country was among the “Fragile Five” with high inflation and intense pressure on the rupee. “At that time, the currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the Fragile Five,” he said and quoted from his opening statement which spoke of opening a special deposit window for the diaspora to tide over the crisis.
But the governor was quick to note that the country is no longer weak, saying, “Today, we are the fastest growing large economy in the world, having long exited the ranks of the Fragile Five.”
Dr Rajan also mentioned the other measures he had spoken about, including inflation-targeting, introducing new kinds of banks and taking universal ones on-tap and addressing the asset quality stress through a database. “Today, I feel proud that we at the Reserve Bank have delivered on all these proposals,” said Dr Rajan, who had also served as the chief economic adviser under the UPA government under Mr Chidambaram before taking over as RBI chief. Besides, he also headed a committee on financial sector reforms.
At the end of his three-year tenure Dr Rajan will become the first RBI governor since 1992 to have a term of less than five years. His predecessors — D Subbarao (2008-13), Y.V. Reddy (2003-08), Bimal Jalan (1997-2003) and C. Rangarajan (1992-97) — all had five-year (three plus two) terms or more.
Pointing to the over-$360-billion forex kitty, Dr Rajan said it is a record high and reiterated confidence about comfortably weathering the NRI deposit repayments, due soon, without hitches.
Like for any other RBI governor, the most contentious point in the relationship with the finance ministry was the rate-setting strategy; by raising rates, he behaved contrary to North Block’s wishes.
Dr Rajan, however, tried hard to convince them that they wanted to help give credibility to RBI’s ability to rein in inflation and that once he became confident of the shift in the trajectory, he started lowering the rates.
In the letter, Dr Rajan said the RBI has cut the key rates by 1.50 per cent since taking an accommodative stance in January 2015.
He also counted helping the government create the Bank Board Bureau, creating a whole set of new structures to allow banks to recover payments from failing projects, and forcing timely bank recognition of their unacknowledged bad debts and provisioning under the Asset Quality Review (AQR) as other achievements.
Dr Rajan said the enabling framework for National Payments Corporation of India to roll out the Universal Payment Interface will soon “revolutionise mobile to mobile payments” in the country.
The letter did not mention much on changes in the RBI’s functioning but said, “The RBI has gone through a restructuring and streamlining, designed and driven by our own senior staff. The integrity and capability of our people, and the transparency of our actions, is unparalleled, and I am proud to be a part of such a fine organisation... It has been a fantastic journey together!”