Raghuram Rajan announces will step down as RBI Governor in September

The RBI Governor said in a staff letter that he would like to return to academia

Ending months of speculation over whether or not he would continue as RBI Governor, Raghuram Rajan on Saturday said he intends to step down at the end of his term on September 4 this year to return to academia. Officials said Prime Minister Narendra Modi's office have no immediate comment on the development, according to a Reuters report.

"I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished. .... 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.  I will, of course, always be available to serve my country when needed."

In a tweet, Finance Minister Arun Jaitley acknowledged the development, saying the "government appreciates the good work done by him and respects his decision. A decision on his successor would be announced shortly". 

Former finance secretary Arvind Mayaram noted in a tweet that "Raghuram Rajan's decision not to seek second term would be very costly for the eco(nomy). Not a good omen."

Rajan's bete noire of late, BJP Rajya Sabha MP Subramanian Swamy was less kind. in an acerbic comment to wire agency ANI, Swamy said "Was he getting a 2nd term in the first place? If he says he wants to go, I've no problem. Let him pretend that he is giving up and going. As long as he is going,it is good."
 

 

Swamy had in a mid-May letter to PM Modi accused Rajan of wilfully wrecking the Indian economy, going so far as to call him "mentally not fully Indian", and had called for his sacking. 

Of his own term, Rajan noted the new inflation-focused framework that he said has halved inflation and "allowed savers to earn positive real interest rates on deposits after a long time". He also pointed to the 150 basis-point cuts in the policy rate he had undertaken since the start of 2015 -- having raised rates intially after taking office - when inflation started to fall below Rajan's own mandated targets. This, Rajan said in his letter, has "reduced the nominal interest rate the government has to pay even while lengthening maturities it can issue – the government has been able to issue a 40 year bond for the first time".

On the currency front, which was a significant concern in 2014, the RBI moved to stabilise the rupee swiftly in a bid to calm markets and investors. "... the currency stabilized after our actions, and our foreign exchange reserves are at a record high, even after we have fully provided for the outflow of foreign currency deposits we secured in 2013," Rajan wrote in his letter, adding that "Today, we are the fastest growing large economy in the world, having long exited the ranks of the Fragile Five."

ALSO READ: Full text of Raghuram Rajan's message to RBI staff

Rajan also played down the impact on the Indian economy of the now-suspended Brexit vote, as well as the impending withdrawing of almost $20 billion as part of the Foreign Currency Non-Residential (FCNR) deposits he had made available to overseas Indians. 

"Colleagues, we have worked with the government over the last three years to create a platform of macroeconomic and institutional stability. I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit. We have made adequate preparations for the repayment of Foreign Currency Non-Resident (B) deposits and their outflow, managed properly, should largely be a non-event," Rajan wrote in his letter. 

The announcement, made in a letter to the RBI staff, and put out as a press release on the central bank's website, puts an end to months of debate about whether the Modi government would extend Rajan's term as well as whether he himself would stay on in the face of mounting, and often shrill, criticism.

Swamy, for example, had accused Rajan of planting a ticking bomb in the Indian economy in the form of the FCNR deposits, which are due for redemption later this year, and which he said would prompt a flight of almost $20 billion from the Indian economy. 

Swamy kept up the attack, saying at an event last week in Mumbai that Rajan should be sent back to Chicago if the Indian economy is to achieve a 10% growth rate. 

Corporate India, however, had kept its faith in the former professor of finance from the University of Chicago's presitigious Booth School of Business, despite complaints that he had not cut interest rates often, and enough, to stimulate investment. 

"Rajan is going about finishing his unfinished agenda. At this stage, to change to someone else would mean shifting gears. It is better Rajan completes his journey over the next term," Harsh Mariwala, Chairman of Marico Indusries, had recently told Business Standard.

"Raghuram Rajan has had an admirable term as RBI Governor. He has instilled confidence domestically and globally too has earned praise for his astute handling of monetary policy," Harsh Goenka, chairman of RPG Enterprises, had said at the same time.

Rajan, indeed, could claim much credit for taming what appeared to be runaway double-digit inflation when he took office in September 2013. He took measures to shift to a retail-inflation fighting mode, and raised interest rates. Eventually, inflation fell below the desired targets Rajan had set, albeit aided in no small part by a global slowdown that pushed down oil and commodities prices, allowing him to cut interest rates. 

However, Rajan's most lasting legacy as the central banker of one of the world's fastest growing large economies will likely be his efforts to clean up public sector banks' balance sheets, forcing them to recognise non-performing assets (NPAs) early on instead of postponing them in an effort to dress the books. 

Under his direction, public sector banks have had to disclose the extent of the rot in their loam books, a dose of bitter medicine that has seen thousands of crores of NPAs seeing the light of the day. 

In fact, the unprecedented crackdown on state-owned banks' lending and recovery systems prompted his Chicago University colleague and co-author Luigi Zingales to conjecture that the attacks on Rajan may have been prompted by his "fighting the inefficiency of the banking system" and for taking on the crony capitalists in the country. 

At the same time, for the first time ever, he opened up the path for more banks to be created, approving a so-called 'on-tap licensing' policy that would allow any corporate entity to start a bank as long as it met the requirements. Of course, the payments bank experiment has not panned out as he might have liked, with multiple licencees backing out after finding the prospect unviable. 

Rajan's term was also marked -- some might say marred - by comments that on a couple of occasions attracted criticism. The one that put him under the harshest glare was when he compared India's economic growth story to that of the fictional 'one-eyed man' being king in the country of the blind. 

"I think we have still to get to a place where we feel satisfied. We have this saying - 'In the land of the blind, the one-eyed man is king'. We are a little bit that way," Rajan had said while on a visit to the US when asked for his take on the "bright spot" theory and what his "secret sauce" was to ensure such a position.

That comment drew criticism from a number of central ministers. Commerce Minister Nirmala Sitharaman said "I may not be happy with his choice of words. Whatever action is being taken by this government is showing results." 
Minister of State for Finance Jayant Sinha was more blunt: "We are the shining star. I don't agree with what the Governor said."

Finance Minister Arun Jaitley himself, though, was more circumspect in public.While pointing out that the economy was in a good spot, Jaitley also added  "I don't think we discuss these matters in the media or publicly. It is not proper to make comments on this at all," he said at the time. 

However, that Rajan's comments hadn't gone down well was evident when a few days later, he apologised for his words, albeit with reference to the visually-impaired. 
 

"I want to apologise to a section of the population, the visually impaired, who might be hurt by my statement," Rajan said, adding that "My intent in saying 'one-eyed king in the land of blind' was to say that our outpeformance is in the midst of global weakness."

Meanwhile, as demands for an extension for Rajan grew, and the government reiterated that no decision had been made yet, rumours about his exit refused to die down, prompting Rajan to quip at his most recent policy review on June 7, that "It would be cruel of me to spoil the fun that the press is having on my extension."