India's central bank Governor Raghuram Rajan said he will step down when his term ends in early September, an unexpected move that came after a key ally of Prime Minister Narendra Modi criticized him for keeping interest rates too high.
In a letter to staff published on Saturday, Rajan listed a range of accomplishments since he took office in 2013, including a shift to inflation targeting, stabilizing the rupee and helping with reforms to state-run banks. He said more work was left to be done on reining in inflation and cleaning up the banks.
Raghuram Rajan
Photographer: Prashanth Vishwanathan/Bloomberg
“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,” Rajan said. “I will, of course, always be available to serve my country when needed.”
Finance Minister Arun Jaitley said the government appreciates the work done by Rajan and respects his decision. A successor will be announced shortly, he said on Twitter.
'Negative Surprise'
Rajan's exit risks unraveling sweeping changes to the central bank that he orchestrated since taking office. The former International Monetary Fund chief economist backed efforts to create a monetary policy committee and strongly advocated fiscal discipline to boost India's credibility with bond investors.
"This is a negative surprise for India,” said Tirthankar Patnaik, a Mumbai-based economist at Mizuho Bank Ltd. "In India's impending macro scenario, Rajan's presence would have been really, really important. Without him, things are likely to be much more difficult."
The uncertainty over Rajan's future has hung over the markets for weeks. When reports of Rajan's desire to leave the post emerged on June 1, the rupee and bonds fell. The topic of his reappointment came up repeatedly at a conference in Singapore, where "investors unequivocally wanted Governor Rajan to continue,” according to a Deutsche Bank AG report last month.
Bad Timing
The timing is "certainly bad” for India due to uncertainties over the monsoon and Brexit, according to Rupa Rege Nitsure, group chief economist at L&T Finance Holdings.
"There will be some nervousness initially but it may not last for very long,” Nitsure said of the market reaction. "Whom they select as the next governor will have a deeper impact on market sentiment.”
Rajan took charge of the central bank when the rupee was at a record low and the inflation rate was among Asia's fastest. After tight monetary policy and a crash in global oil prices helped damp price pressures, he began cutting borrowing costs last year and brought the benchmark rate to a five-year low of 6.5 percent. He's now in the midst of a $ 120 billion clean up of stressed assets in the banking system.
Swamy Strikes
Subramanian Swamy, a member of Modi's ruling party, sought Rajan's dismissal for keeping interest rates unnecessarily high and stifling growth. Swamy also said India should scrap the inflation target and look at employment to guide policy.
Jaitley, however, defended the inflation target established last year in conjunction with Rajan, calling it “extremely important for us.” A new monetary policy committee would “hopefully” start working by the year's end, he said in a May 30 interview.
Rajan is currently on leave from the Chicago Booth School of Business. India's central bank chiefs are appointed by the prime minister in consultation with the finance minister. Ten of 22 governors — including Rajan's three immediate predecessors — served at least five-year terms. Two of them — in 1937 and 1957 — resigned earlier due to differences with the government.
"I am sure the reforms the government is undertaking, together with what will be done by you and other regulators, will build on this platform and reflect in greater job growth and prosperity for our people in the years to come,” Rajan said in the letter. “I am confident my successor will take us to new heights with your help.”
In April, stock brokerage Ambit Capital Pvt. listed four potential replacements for Rajan:
- Urjit Patel, Rajan's deputy at the Reserve Bank of India
- Arundhati Bhattacharya, chairman of the State Bank of India, the nation's largest government-controlled lender
- Shaktikanta Das, economic affairs secretary in the Finance Ministry
- U.K. Sinha, chairman of the Securities & Exchange Board of India
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