Opinion

This could be Raghuram Rajan's last monetary policy statement

Even if the RBI governor gets a second term.

Reserve Bank of India Governor Raghuram Rajan may make his final monetary policy statement on Tuesday – and it won't be because of Subramanian Swamy. Most analysts expect Rajan to hold interest rates steady, while the markets will be paying especially close attention to any indication of whether the RBI governor is to get a second term after his current one ends in September. Yet even if he does, there is a good chance that this might the last statement coming solely from Rajan.

This is because the next policy review is not up until August, by which time the Reserve Bank is likely to have set up its new monetary policy committee. This panel, which was officially introduced through the Finance Act this year, will have the task of deciding the rates at which the central bank lends, a key indicator that sets the benchmark for banks throughout the economy.

Until this year, India's monetary policy was decided solely by the governor, in consultation with a technical advisory panel within the bank. In March 2015, the RBI chose to sign a deal with the government that specified the very aim of monetary policy in India: to target inflation. Then, in the Finance Act this year, the government unveiled the specifics of a monetary policy committee that would set policy rates.

New panel

The new panel includes three members from the RBI – the governor, the deputy governor and another one picked by the central bank – as well as three members nominated by the government. The RBI governor will not have veto powers, but will have the casting vote in case of a tie.

The government has already begun the process of selecting its three independent members to the committee. Once they have been picked, the policy rates will be set by the new panel with the aim of fulfilling the inflation control target. Most expect the appointments to be made before the next monetary policy review in August.

This means Rajan might have more time to do other things, like reading all the reams of punditry and the petitions on whether he should continues as RBI Governor after his term ends in September. Bharatiya Janata Party Member of Parliament Subramanian Swamy has been vocally opposed to giving Rajan an extension.

Swamy vs Rajan

Swamy's comments have gone beyond criticism, with claims that Rajan is an American agent, putting the government in a tough spot. The finance minister has criticised the personal attacks on Rajan, while Prime Minister Narendra Modi said it should not be an "issue of interest to the media".

The attacks have also prompted response from many, including those like Swaminathan Aiyar who have argued that Rajan leaving the RBI would also result in billions of dollars of investment leaving the country. Meanwhile, petitions calling for Rajan's term to be renewed have received more than 60,000 signatures. As a result, analysts and the market will likely be paying as much attention to indications of Rajan's tenure as they will be to the actual interest rate changes, if any, announced on Tuesday.

Most analysts seem to believe that Rajan will hold rates steady, especially since he is facing a list of very confusing indicators that do not lend themselves to easy interpretation. The governor is also unlikely to actually say anything about his tenure, although his comments on everything from growth to inflation expectations and non-performing assets will still be worth paying attention to.

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