Rajan Departure Raises Questions

Raghuram Govind Rajan, governor of the Reserve Bank of India (RBI), will not seek a second term when his tenure ends, in early September. This makes him the shortest-serving governor of India’s central bank since 1990. Rajan’s announcement of his departure has raised many questions, and the most critical one concerns Prime Minister Narendra Modi’s commitment to reform. Rajan’s sudden exit from the RBI is bad news for the Indian economy, according to many market observers, both local and international.

The reason why Rajan chose to leave early matters as much — if not more — than the consequences of his departure. There has been some speculation. For instance, this week Shweta Singh, a London-based analyst and senior economist with Lombard Street Research, wrote his clients that “the most concerning explanation is that Rajan’s departure is the fallout from his tough stance on cleaning up state-owned banks’ bad loans.

“His determination might have become a growing source of discomfort to the banks, large corporate borrowers and the government,” Rajan continued. “Reining in the evergreening of loans is a precondition for the pick-up in productive investment that India badly needs, and the process was only just getting started.”

Rajan Leaves India’s Economy Stronger That It Was

However, a serious inflation-targeting framework is now in place, and this has all but eliminated the ad hoc nature of the country’s monetary policymaking. A six-member Monetary Policy Committee will now set the benchmark interest rate.

Three members will be from the RBI (including the governor) and three will be appointed by the government, with the RBI governor having the deciding vote. In addition, a recently approved bankruptcy law should help in dealing with nonperforming loans. This is notable progress, for which Rajan was in part responsible.


Rajan joined the central bank as governor in 2013, when emerging markets (especially India), were going through one of their toughest episodes since a series of crises in the 1990s. Much has changed since then. Inflation is “well within the central bank’s comfort zone (5.7% in May), moderating from double digit rates in 2013,” Singh wrote. Moreover, India’s current account deficit stood at 0.1 percent of GDP in Q1, much lower than the 7 percent deficit at the end of 2012.

The country’s official currency, the rupee, was one of the worst emerging-market performers during the 2013 “taper tantrum,” but it has been one of the best-performing currencies since 2014. Foreign exchange reserves plunged by $17 billion during April–September 2013, but have since increased by $92 billion.

One slightly less negative aspect of Rajan’s sudden exit is that it’s going to be less painful now than it would have been a couple of years ago, as India’s economic imbalances have been significantly reduced during his term of office.

Photo Credit: Reuters