Rajan’s exit from Indian Reserve Bank rattles investors

rbi rhaguram Rajan

June 20, 2016 (LBO) – India’s Central Bank Governor Raghuram Rajan said in a letter on Saturday that he won’t serve past his term which ends in September, a reflection of a tense relationship with the government and their attempt to push him out the door.

Rajan becomes the first RBI governor since India’s economic liberalization began more than two decades ago not to serve an extended, five-year term. The exit isn’t a total surprise given tensions with India’s Hindu nationalist ruling party, the Wall Street Journal reported.

A widely-shared speech arguing for freedom of expression and the tolerance of different ideas and beliefs, was an instance where nationalists took offense, commentators said.

The move will rattle investors, and the rupee will likely weaken on the news, ahead of the British Brexit vote which is another stress test of the economy.

Rajan arrived on the job in 2013, when India was being lashed by outside forces. Years of lax monetary policy, stubborn inflation and a burgeoning current-account deficit made India vulnerable.

The Reserve Bank of India, under him, moved to restore faith, alleviating a balance-of-payments crisis by providing dollar funding to oil importers and opening new channels for foreign capital to flow into India’s banks.

Rajan lured inflows of about 34 billion dollars through discounted foreign-currency swaps.

His biggest credit goes to breaking the back of inflation expectations, using the discipline of an inflation target and unpopular rate increases.

Inflation has perked up in recent months, and a new governor with less steely nerves may not follow through on the central bank’s longer-term project of getting inflation into the low single digits.