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Did Modi wreck it? Top experts on Rajan's decision to exit

Did Modi wreck it? Top experts on Rajan's decision to exit

Reserve Bank of India governor Raghuram Rajan's announcement this weekend that he would step down from his role in early September has shocked investors not just in India but around the world.

The former IMF chief economist has largely been viewed as a stabilising force for India's markets and economy and his sudden decision to leave his post is being seen as being driven by undercurrents of conflict with some some members of the ruling Bharatiya Janata Party.

Rajan announced that he would return to the University of Chicago when his three year term as governor ends on September 4. Media reports said PM Narendra Modi was reluctant to automatically renew Rajan's term, making him the first governor to be denied a term extension since the 1990s.

Citywire Asia collates the views of  leading investment experts on the implications of  Rajan's imminent departure.

Kenneth Akintewe, Aberdeen Asset Management

Fixed income (Asia) senior investment manager

The impact of Rajan’s departure should not be overstated. There’s no doubt he is a foreign investor favourite who represents stability and competence – a steady pair of hands who stood up against political interference and fought for central bank independence.

However, reform in India is more than the work of one man. The government has been as important as the central bank in attracting record foreign direct investment, the transition to a positive basic balance of payments and keeping food inflation under control.

Meanwhile, a credible Monetary Policy Committee, inflation-targeting and the overhaul of bankruptcy rules are enshrined in legislation, thus helping to ensure policy continuity. Prime Minister Narendra Modi, more than anyone, understands their importance.

Rajan will be missed but he is not irreplaceable. Among the candidates are Arvind Subramanian, chief economic advisor to the government and a former IMF colleague. Urjit Patel, a deputy governor at the Reserve Bank of India and an important architect of some of the key reforms, is also a leading contender.

There will be a knee jerk reaction and the rupee will be a casualty, but Rajan is still at the helm for the next three months or so. We expect central bank intervention to dampen volatility and minimise the impact on the currency. However, long-term investors and foreign direct investor flows are unlikely to be swayed’.

Shweta Singh, Lombard Street Research

Senior economist

The biggest progress in India since the GFC has been on financial sector reform, led by Rajan.

His work on this front started well before his tenure as RBI governor when then-Prime Minister Manmohan Singh named him his economic adviser in 2008. Some steps have been implemented, but many are still in the pipeline.

Rajan’s abrupt exit from the RBI is bad news for the economy. Why he chose to leave early matters as much – if not more - than the consequences of his departure.

The most concerning explanation is that Rajan’s departure is the fallout from his tough stance on cleaning up state-owned banks’ bad loans.

Reining in the evergreening of loans is a precondition for the pick-up in productive investment that India badly needs, and the process was only just getting started.

If true, this is a very worrying development and reflects badly on Modi’s reform agenda.

On a slightly less negative note, Rajan’s exit would have been more painful a couple of years ago. India’s economic imbalances have been significantly reduced during his term of office.

Crucially, an inflation-targeting framework is now in place that has swept away the ad-hoc nature of monetary policy setting.

Kunal Desai, Neptune IM

Manager of the Neptune India fund

The investment story of improving macro fundamentals, a sharper focus on micro reforms and a rejuvenation of corporate profitability will be little affected by Rajan’s decision to return back to academia in the US.

That said, his tenure at the helm of the RBI has been an unequivocal success. His international credibility, vision and courage has meant that Indian macroeconomic fundamentals are in a far stronger position than those that he inherited.

Looking ahead, the appointment of his successor over the coming months will be an important moment.

We would be looking for an independent replacement who continues to carry forward Rajan’s legacy, particularly on inflation targeting and the clean-up of the banking sector’s stressed assets.

There are a number of suitable candidates who we would consider appropriate to continue his good work. Rajan himself noted last week that “the central bank will survive any governor, it’s important not to personalise this office” and – like much of his tenure at the RBI – we would concur with him.

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