Whither Modimentum?
India’s Chief Banker Throws in the Towel

Despite statements in past weeks indicating he wasn’t going anywhere, India’s highly-respected and outspoken central bank governor has decided to step down at the end of his term. The news does not bode well for economic reform hopes, the Financial Times worries:

The announcement that Raghuram Rajan will leave his position as governor of India’s central bank, the Reserve Bank of India, in September could send tremors through India’s financial markets. Even if immediate reactions are muted, the longer-term effects will be more telling.

When he took the position in September 2013, the rupee was in free fall, the economy was stalled and inflation was in double digits. Mr Rajan proved to be the steadying hand the economy needed. He tackled inflation and strengthened the financial system. His deft stewardship of monetary policy won the confidence of domestic and foreign investors, allowing him to manage the balancing act between controlling inflation and supporting growth. Under his tenure, the RBI has taken important steps to develop financial markets, improve their regulation and broaden access to the banking system.

Many economists and investors have have a high opinion of Rajan, but the governor has been under a siege of personal attacks and political assaults at home in recent months. India’s business elite fears that Rajan’s reforms would have eliminated some of the special privileges they enjoy. Meanwhile, the Hindutva core of the ruling BJP party has waged a very public campaign against Rajan, even petitioning Modi to remove him on charges that he has held back growth and is “mentally not fully Indian”. Rajan’s continued criticisms of Modi (he once called him the “one-eyed king in the land of the blind”) certainly did not help.

The BJP did all it could to make Rajan’s life difficult. Rather than give him the customary seven-month notice on an extension of his term, they made Rajan reapply and allowed other candidates to compete for the job. That was apparently too much for Rajan.

Modi’s India has enjoyed strong economic performance even as the sluggish global economy flirts with recession. However, the outgoing governor pointed out throughout his term that India’s growth is still on “shaky foundations”. Modi seems to understand that, but he has different ideas for how to get India on stronger footing. With his key reform initiatives stalled in parliament, Modi may be looking to assert more control over the central bank so that it will pursue his preferred aggressive monetary policies; Rajan had been a moderating force on those ambitions. Last fall, Modi tried to wrestle some monetary policy tools away from the Reserve Bank of India. Is this Plan B?

Whatever game Modi is playing, the sacrifice of successful, internationally-respected talent to the Hindu nationalist and cronyist gods of New Delhi politics doesn’t strike us as the sort of development that bodes well for India’s future.

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