Reserve Bank of India: Why Did Rajan Go?

Euromoney, August 2016

All eyes are on the expected appointment of a new Reserve Bank of India governor, but nobody is quite clear why there needs to be a new one.

As India moves closer to a decision on the next governor of the Reserve Bank of India, bankers there are still trying to figure out why there needs to be a replacement at all. Raghuram Rajan’s decision not to seek an extension of his term as governor – widely seen as him being ousted – has baffled international observers who associate him with progress and drive.

The picture is not entirely clear to locals either.

Viewed from the outside, it is a baffling decision. Much of Narendra Modi’s success as prime minister has rested on his ability to present India in a positive light internationally, and in that respect, Rajan has been a staunch ally. He has achieved an enormous amount in less than three years: banking reform, curbing inflation, building foreign exchange reserves, dealing with a potential currency crisis, beginning the globalization of the rupee and supporting India Stack, the range of digital apparatus that is coming together in India based on the Aadhaar biometric card. Removing Rajan dramatically diminishes that international standing, so why is he out?

An outspoken man, he was certainly not without enemies. “There were plenty of bankers who wanted him out because he was tough on the banks on lending,” says one senior figure. “There were plenty of industrialists who wanted him out because he was tough on them too.”

And that is nothing compared with the ministers and other politicians he had annoyed. BJP party leader Subramanian Swamy wrote to the prime minister in May saying Rajan was “mentally not fully Indian” and that he had “wilfully” wrecked the economy.

So, removing Rajan keeps some of Modi’s political constituency happy, but can that be enough to explain it?  A wider theory is that Rajan had become so much of a rock star in international circles that he had come to represent the RBI to an almost unhealthy degree, and that replacing him allows India to demonstrate that its central bank is more than a one-man band.

At the time of writing, three names are considered to be in the mix to replace him, with Arundhati Bhattacharya no longer considered in the running as she is thought likely to have her tenure at State Bank of India extended.  Two of the candidates have been RBI deputy governor, Subir Gokarn and Rakesh Mohan; a third is Arvind Panagariya, vice-chairman of the Niti Aoyag, a planning commission.

Nomura interprets Panagariya as dovish, Gokarn as neutral and Patel as hawkish, with Patel closest to Rajan’s views.  Whoever takes over will have an in-tray dominated by inflation and bad loans in the banking sector.

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