Rajan Jolts India With Move to Exit After Being Scolded on Rates

Serra: Rajan Stepping Down 'Very Bad Day for EM'
  • Rajan tells staff he will go back to academia after Sept. 4
  • Finance minister says India will announce successor soon

India’s central bank Governor Raghuram Rajan said he will step down when his term ends in early September, an unexpected move that came after a key ally of Prime Minister Narendra Modi criticized him for keeping interest rates too high.

In a letter to staff published on Saturday, Rajan listed a range of accomplishments since he took office in 2013, including a shift to inflation targeting, stabilizing the rupee and helping with reforms to state-run banks. The 53-year-old said more work was left to be done on reining in inflation and cleaning up the banks.

Raghuram Rajan
Raghuram Rajan
Photographer: Prashanth Vishwanathan/Bloomberg

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

Finance Minister Arun Jaitley said the government appreciates the work done by Rajan and respects his decision. A successor will be announced shortly, he said on Twitter.

‘Negative Surprise’

Rajan’s exit risks unraveling sweeping changes to the central bank that he orchestrated since taking office. The former International Monetary Fund chief economist backed efforts to create a monetary policy committee and strongly advocated fiscal discipline to boost India’s credibility with bond investors.

“This is a negative surprise for India," said Tirthankar Patnaik, a Mumbai-based economist at Mizuho Bank Ltd. “In India’s impending macro scenario, Rajan’s presence would have been really, really important. Without him, things are likely to be much more difficult.”

Rajan’s letter on Saturday caught Modi’s government by surprise, according to a person familiar with the situation. The administration saw the consultations between Rajan and Jaitley over his second term as still ongoing, and it has no obvious successor lined up, the person said.

Bad Timing

The uncertainty over Rajan’s future has hung over the markets for weeks. When reports of Rajan’s desire to leave the post emerged on June 1, the rupee and bonds fell. The topic of his reappointment came up repeatedly at a conference in Singapore, where “investors unequivocally wanted Governor Rajan to continue," according to a Deutsche Bank AG report last month.

The timing is “certainly bad" for India due to uncertainties over the monsoon and Brexit, according to Rupa Rege Nitsure, group chief economist at L&T Finance Holdings. 

“There will be some nervousness initially but it may not last for very long," Nitsure said of the market reaction. “Whom they select as the next governor will have a deeper impact on market sentiment."

Accolades for Rajan poured in on Saturday. Lawrence Summers, a former U.S. treasury secretary, called Rajan “one of the few central bank governors who has changed the regime in a major country." State Bank of India Chairman Arundhati Bhattacharya called Rajan “a person of very high caliber, who has built ably on the reputation of our central bank and given it a very large measure of credibility."

Swamy Strikes

Rajan took charge of the central bank when the rupee was at a record low and the inflation rate was among Asia’s fastest. After tight monetary policy and a crash in global oil prices helped damp price pressures, he began cutting borrowing costs last year and brought the benchmark rate to a five-year low of 6.5 percent. He’s now in the midst of a $120 billion clean up of stressed assets in the banking system and helping to establish a new monetary policy committee.

Subramanian Swamy, a member of Modi’s ruling party, sought Rajan’s dismissal for keeping interest rates unnecessarily high and stifling growth. Swamy also called Rajan “mentally not fully Indian" and criticized him for a speech last year that called for tolerance last year amid a debate over religious discrimination.

Possible Successors

Rajan is currently on leave from the Chicago Booth School of Business. India’s central bank chiefs are appointed by the prime minister in consultation with the finance minister. Ten of 22 governors -- including Rajan’s three immediate predecessors -- served at least five-year terms. Two of them -- in 1937 and 1957 -- resigned earlier due to differences with the government.

“I am sure the reforms the government is undertaking, together with what will be done by you and other regulators, will build on this platform and reflect in greater job growth and prosperity for our people in the years to come," Rajan said in the letter. "I am confident my successor will take us to new heights with your help."

In April, stock brokerage Ambit Capital Pvt. listed four potential replacements for Rajan:

  • Urjit Patel, Rajan’s deputy at the Reserve Bank of India
  • Bhattacharya, who heads the nation’s largest government-controlled lender
  • Shaktikanta Das, economic affairs secretary in the Finance Ministry
  • U.K. Sinha, chairman of the Securities & Exchange Board of India
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