Rajan says India should not change course, as he steps back from RBI

Raghuram Rajan today (June 20) urged Indian policy-makers to continue his efforts to keep inflation low when he moves on from the central bank later this year.

Rajan is to step down from his role as governor of the Reserve Bank of India (RBI) when his three-year term draws to an end in September. He will return to his position as professor of economics at the University of Chicago, from which he has been on leave.

In a letter to staff on June 18, Rajan said he had been "open" to the idea of spending more time at the RBI, to see through the work he has begun on establishing an inflation-targeting framework and cleaning up the banking sector.

However, "on due reflection, and after consultation with the government", he decided not to continue on. "I am an academic, and I have always made it clear that my ultimate home is in the realm of ideas."

Rajan ruffled feathers in parts of the government with what many saw as a strict stance towards inflation and the banking sector. During his term, he oversaw rate hikes that helped bring inflation from more than 10% to around 5%, and came down hard on banks for what he called an "extend and pretend" attitude to non-performing loans. Early on, his actions helped to end volatility in the value of the Indian rupee.

Although his actions won him praise abroad – including Central Banking's 2015 governor of the year award – at home, many criticised his approach as anti-growth and anti-business.

In his speech today, Rajan defended his record on inflation, arguing – as he has done many times during his term in office – that low inflation is a necessary condition for growth.

"The period when a high-inflation economy moves to low inflation is never an easy one," he said. "The wrong thing to do at such times is to change course."

Managing frustrations

Sundeep Bhandari, a former regional head for India at Standard Chartered, described Rajan's decision not to stay on as "disappointing". Bhandari said the governor's candidness was a "breath of fresh air", adding that he "managed his frustrations very well".

Many of Rajan's frustrations came from the government, which did not always approve of his candidness. Recently, the RBI governor came under attack from Subramanian Swamy, a member of India's upper house, who penned an open letter to the government calling for Rajan's dismissal. The government preferred to stay quiet, rather than coming to their governor's defence.

In a tweet on June 18, finance minister Arun Jaitley said the government appreciated Rajan's "good work" and "respects his decision". He added that the choice of a successor would be "announced shortly".

Hugh Sandeman, a managing director at Langham Capital, says it is telling that the government did not push Rajan out, "but they did not fight to hang on to him either". Sandeman takes this as a sign the government is not planning to abandon Rajan's reform agenda, but may wish for a candidate that will be more pliable on interest rates.

Sandeman also says the stock market reaction, with India's Sensex closing up 0.91% today, is significant: "People had been expecting [Rajan's departure]. It had been quite widely talked about."