Bank Report

Raghuram Rajan's letter makes it clear – leaving the RBI wasn't his decision

The RBI governor said he was open to continuing in the role.

Raghuram Rajan will not be the governor of the Reserve Bank of India after September. That's not idle speculation inspired by Bharatiya Janata Party leader Subramanian Swamy's campaign calling for him to leave. It has been announced by Rajan himself in a letter to his colleagues at the central bank which the RBI published on Saturday. The internationally renowned economist wrote that he will be returning to academia after the end of his tenure as governor on September 4.

This ends months of speculation over whether Rajan, a United Progressive Alliance appointee, would see his tenure extended after his three-year term ends. Swamy was at the head of a public, often nasty campaign calling for Rajan to be sacked because he is not "mentally fully Indian." Swamy claimed that there were many others in the BJP who agreed with him.

The campaign prompted plenty of pushback from others, particularly economists who have lauded Rajan for his efforts in helping stabilise the Indian economy over the past few years. Many also suggested that not extending Rajan's tenure would have a detrimental effect on India's image with the business community abroad. The Economic Times' Swaminathan Aiyar even said that Rajan leaving would see billions of dollars in investment also follow him out of the country.

There were murmurs also that many in the establishment did not want Rajan to continue, in part because of his insistence on hawkish monetary policy that focused more on controlling inflation than cutting interest rates to make credit cheaper for industry.

The other reason why the government wanted him to go: Rajan's celebrity status, at home and abroad, meant he was one of the few people who could publicly criticise the government's policy. Most prominently, just as the government was touting India's status as the fastest growing major economy in the world, Rajan brought up the old phrase, "in the land of the blind, the one-eyed man is king."

Swamy's campaign might have embarrassed the government, prompting the Prime Minister to say that the media shouldn't discuss these things and Finance Minister Arun Jaitley to criticise the personal attacks. But it hasn't stopped the government from asking him to leave.

Rajan says as much in his letter to his colleagues at the central bank.

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. Moreover, the bank clean up 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.

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. I will, of course, always be available to serve my country when needed.

(Emphasis added) 

As he wrote, Rajan was "open" to seeing the developments through, but the government was not on the same page. Discussions between the finance ministry and Rajan before the last monetary policy statement, where the central banker chose not to cut rates, did not go well.

As a result, come September, Rajan will be back at the University of Chicago and India will have a new RBI governor. Significantly, however, Rajan's final monetary policy statement is also likely to be the last one put out solely by an RBI governor: His tenure saw the signing of monetary policy agreements between the central bank and the government agreeing to inflation targeting as the primary aim of the RBI, as well as the setting up of a monetary policy committee – including government appointees with no RBI veto – that will set the interest rate.

Whatever the view of his tenure as central banker, and there will be many over the coming days including the Sensex's verdict on Monday morning (which is probably why the decision was announced on the weekend), he will have left the RBI in a very different place than where the institution was before him.

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