Rajan, who is seen as one of the most influential economists, said the RBI has achieved more than what it planned during his term and there is an unfinished agenda.
ET Bureau
MUMBAI: Reserve Bank of India governor Raghuram Rajan sent shock waves through the investing community and industry on Saturday by opting to return to academia at the end of his term in September amid signals of differences with the government.
The Chicago University professor, who is seen as one of the most influential economists, said the RBI has achieved more than what it planned during his term and there is an unfinished agenda.
The decision comes amid the ruckus created by BJP MP Subramanian Swamy, who said Rajan’s interest rate policies held back India’s economic growth and he was not “mentally Indian” to frame policies for its benefit.
In an open letter to RBI staff, Rajan indicated he was prepared to have a second term to fix the financial sector and take the monetary policy framework to its logical conclusion, but the consultations with the government did not go the way that would have made him stay back on Mint Street.
“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," Rajan wrote. “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 threeyear term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished.”
Rajan's decision would leave a hole in the central banking policymaking till the government comes up with a successor. Finance minister Arun Jaitley said the government would find a successor soon. Even then, it might be difficult to fill Rajan’s shoes in terms of convincing investors about continuing prudent monetary policies, and having a tough approach on cleaning up banks.
“This is a sad day,” Rajiv Lall, chairman of IDFC Bank, tweeted. “Can we transform the nation and lose our best people?’’ When Rajan took charge in September 2013, Indian economy was collapsing, with the currency plunging to new lows which led to his announcing a special US dollar deposit scheme that brought in about $30 billion.
He also raised the amount of bonds that foreigners could hold in India, leading to higher portfolio inflows. Those deposits are maturing in the next few months and the central bank says it is prepared to face it.
“The currency stabilised after our actions, and our foreign exchange reserves are at a record high, even after we have fully provided for the outflow of foreign currency deposits we secured in 2013," said Rajan. “Today, we are the fastest growing large economy in the world."
Inflation targeting as a monetary policy framework, a strict no-no in the political circles, was made possible during his term, which elevated India’s credibility among international investors. But the Monetary Policy Framework is yet to be put in place. “Rajan is a person of very high calibre, who has built ably on the reputation of our central bank and given it a very large measure of credibility,” said Arundhati Bhattacharya, chairman, State Bank of India.
The Modi administration has been unappreciative of merit, say rivals. “I am not surprised at all,” said former finance minister P Chidambaram, who was instrumental in appointing Rajan. “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, this government did not deserve Dr Rajan. Nevertheless, India is the loser.”
ET Bureau
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