Rajan’s reappointment as governor is ‘almost a done deal’ – and good news for India

An announcement on Raghuram Rajan’s fresh term as India’s chief central banker is likely to be made in August, days before his contract expires. It will be reassuring for investors, writes Himendra Mohan Kumar.

Reserve Bank of India (RBI) governor Raghuram Rajan speaks during an event in central London on May 13, 2016. AFP

NEW DELHI // India’s central bank governor, Raghuram Rajan, will probably be given a two-year extension with the government veering towards the view that a second term for the world-renowned economist would bolster global confidence in the US$2.1 trillion economy.

A senior official at India’s ministry of finance yesterday told The National that an extension to Mr Rajan’s contract – he was appointed by the previous Uni­ted Progressive Alliance government – is “almost a done deal, given the estimation in which he is held by the prime minister”, Narendra Modi.

Another official said a formal announcement by the government on Mr Rajan’s fresh term will be made some time in August, days before his contract expires.

His three-year term at the helm of the Reserve Bank of India (RBI) ends on September 3.

Mr Rajan, 53, is globally recognised as the face of the Indian economy. In the rarefied world of central bankers, he enjoys cult status and is widely cred­ited as the man who, as far back as 2005, foretold the great financial crash of 2008.

Economic experts say that Mr Rajan at the helm of the central bank provides assurance to investors that monetary policy will be run well and there will be pressure on the government to contribute to inflation management and macroeconomic balances through prudent fiscal policy and supply-side management. The government also needs Mr Rajan to be there for some more time to push through the clean-up of public sector banks that is under way. He has also led the push for an inflation target and a monetary policy.

Some powerful detractors are out to scupper his chances for a second term. There are some in the country’s ruling party who have been calling for his head. And a section of the Rashtriya Swayamsewak Sangathan (RSS), the organisation on whose ideology the ruling Bharatiya Janata Party was founded, is resentful of Mr Rajan because of a deep distrust in his IMF and US background.

The most vocal of Mr Rajan’s critics is Subramanian Swamy, a member of parliament from Mr Modi’s party, the BJP, who accused the central banker of “wilful and apparently deliberate attempt” to wreck the economy.

In a letter to Mr Modi on May 16, Mr Swamy recommended that Mr Modi should consider “terminating” Mr Rajan’s job immediately, or at least by the time his term ended.

When he became the RBI’s governor, Mr Rajan held that his major targets were to lower inflation, increase savings and deepen financial markets, of which he believed reducing inflation was the most important.

However, Mr Swamy, an economist and a former Harvard University professor who was also India’s commerce and law minister in 1990-91, said that to curb inflation with rising interest rates was “disastrous” for the country. He also took a personal swipe at Mr Rajan for holding a US green card, which made him “therefore mentally not fully Indian”.

Hinting at what is coming, this week, Arun Jaitley, the finance minister, deplored the nature of personal attacks on Mr Rajan, while Mr Modi said the “issue of reappointment of Mr Rajan was an administrative subject and should not be an issue of interest to the media”.

Mr Modi, in consultation with Mr Jaitley, will effectively decide whether Mr Rajan gets an extension or not.

When Mr Rajan took over as RBI governor in September 2013, the interest rate was 7.25 per cent.

He gradually raised it to 8 per cent and kept it at that level in 2014, citing inflationary concerns, despite increasing calls from industry and the fin­ance ministry to bring it down. Since January last year, he has cut the rates by 150 basis points to 6.5 per cent.

According to research company Capital Economics, the management of monetary policy under Mr Rajan, a former chief economist of the IMF, “has been extremely effective”.

It said that Mr Rajan, soon after he became governor, rolled out policies that helped to shore up the value of the Indian rupee, “which at the time was in free fall against the US dollar as the economy stood on the brink of a balance-of-payments crisis”.

In addition, Capital Economics said Mr Rajan’s tight monetary stance until January last year helped to push inflation down from double digits to about 5 per cent more recently.

Meanwhile, the latest government data has shown that in the previous fiscal year, to March, India’s economic growth outpaced China’s.

For the 2015-16 fiscal year, growth came in at 7.6 per cent, in line with the official estimate. Growth was 7.2 per cent in 2014-15.

The pace of India’s economic growth accelerated to 7.9 per cent in the three months to March from a revised 7.2 per cent in the previous quarter, according to figures released by the Central Statistical Organisation on Tuesday.

Rajeev Sharma, a strategic affairs analyst, said the Modi government suffers from an acute talent deficit and would do well to keep Mr Rajan on its side.

“Rajan’s stewardship may be essential for maintaining the rupee-dollar balance. The rupee has steeply declined since the Modi government came to power, two years ago.

“The rupee will crash through the roof if India doesn’t have an astute economist like Rajan heading the central bank.

“Also, Modi has to prepare a team which would see him through the next general elections in 2019 and Rajan is a go-to guy for him,” said Mr Sharma.

However, Rajiv Kumar, the senior fellow at the Centre for Policy Research, said the government should do a proper evaluation of Mr Rajan’s current term before giving him a fresh stint.

“The objective assessment of Rajan should include three heads: success in controlling inflation, banks’ restructuring and creating growth and employment in the country,” said Mr Kumar.