Markets shrug off Rajan's decision to exit

Image: Danish Siddiqui / Reuters

Raghuram Rajan, governor, Reserve Bank of India (RBI)

India’s financial markets on Monday appeared to have shrugged off the incumbent Reserve Bank of India Governor Raghuram Rajan’s move to quit after his term ends in September this year. Rajan—much loved by investors and well-respected by academia—announced his decision over the weekend, through a letter to central bank staff.

Indian shares and the rupee recovered from a weak opening, with the benchmark 30-share Sensex closing 0.91 percent up at 26,866.91 points and the rupee up 0.47 percent at 67.38 to the dollar. The mood in the market, though sombre, already appears to be going beyond Rajan’s much-discussed persona. As Fitch’s Asia-Pacific Sovereign Group Director Thomas Rookmaaker said in an email to the media, “From a ratings perspective, policies are more important than personalities.”

'The Guv' is going: Raghuram Rajan says no to second term as RBI chief

Rajan’s decision to quit has come as a surprise to many, though he had, in recent weeks, indicated in some television interviews that he was keen to return to academia. This, he confirmed, in a communication to staff last Saturday: “I am an academic and I have always made it clear that my ultimate home is in the realm of ideas,” Rajan wrote to RBI staff.

Rajan’s agenda, however, remains unfinished: He has placed a target of 5 percent for consumer price index inflation by March-end (May 2016 CPI inflation touched a 19-month high of 5.76 percent) and a monetary policy committee, which will set future policies, is yet to be formed. A key programme, the ongoing Asset Quality Review, initiated by Rajan last year, to push public and private sector banks to clean up their balance sheets of rising bad loans, will be watched carefully till its deadline ends in March 2017.

There is also growing speculation on whether the next governor will follow Rajan’s path. Rajan, a former International Monetary Fund chief economist, is armed with degrees from Indian Institute of Technology Delhi, Indian Institute of Management Ahmedabad and a PhD from MIT Sloan School of Management. Add to this: He is eloquent, suave and independently minded.

Rajan managed to guide India’s economy out of a deep gorge in 2013, when the rupee was at a record low, economic growth had slackened and trade deficits were widening. Nearly three years on, the rupee is stable, trade deficits have narrowed and GDP growth at 7.6 percent is the highest among major global economies.

Bankers and economists have spoken highly of the governor. “Rajan is a person of high calibre, who has built ably on the reputation of our central bank and given it a very large measure of credibility,” says Arundhati Bhattacharya, chairman of India’s largest bank, State Bank of India.

Bhattacharya is seen as a front runner to replace Rajan. Others in the race are RBI deputy governor Urjit Patel, former deputy governor Subir Gokarn and economists Rakesh Mohan and Parthasarthi Shome.
 
Says Chanda Kochhar, managing director and CEO of private sector lender ICICI Bank: “Rajan’s decision to return to academia is a personal one, which we must respect. Over the last three years, the RBI has played a major role in steering the Indian economy through a period of volatility across the world. Today, India is the world's fastest growing large economy with stable macroeconomic indicators.”

It has become apparent that Rajan’s decision not to extend his term, goes way beyond the RBI boardrooms. All RBI governors, since 1992, have been granted a term extention. Ambit Capital’s Ritika Mankar Mukherjee and Sumit Shekhar, in a note to clients titled ‘After Rajan, who?’, earlier this month, observed that there were complications which would jeopardise Rajan staying on. These include “a government taking more decisions which dilute RBI’s powers and Rajan himself, who speaks his mind on matters of political import, a dynamic that New Delhi does not appreciate”.

Rajan quits at a time when there have been scathing attacks from some political circles, led by BJP MP Subramanian Swamy, who has accused Rajan of being a “Congress agent” and “sabotaging the country’s economy by putting small and medium industries out of business”.

Rajan’s own outspokenness has not gone down well in political circles. In April this year, he apologised to the visually impaired for the remark ‘A one-eyed man is king in the land of the blind’, in a reference to India’s pace of growth. Rajan has, this year, made references to cash in the public system rising during election time, which drew attention in the media.

Rajan goes at a time when there are a few concerns, both international and domestic. Investors will await the outcome and impact of ‘Brexit’—a possible British exit from the European Union after a referendum on the matter on June 23. Brexit is likely to bring volatility in global markets. Domestically, banks in India are still grappling with cleaning up their balance sheets off bad loans. This could be a longer-than-expected programme.

The focus of the RBI towards financial inclusion and issuing new bank licences is also an unfinished agenda. The macro-economic numbers for India are in place. Corporate earnings (barring financial services) for the March-ended quarter surprised on the upside.

In coming months, attention will shift towards who succeeds Rajan. Whether it is a banker or an economist who takes charge, it would be more important to understand what it takes to succeed. Forbes India