Rajan against projecting RBI as a personality-driven institution

  • HT Correspondents
  • Updated: Jun 04, 2016 06:13 IST

MUMBAI/DELHI: With speculation rife about his possible second term as the Reserve Bank of India governor, Raghuram Rajan is learnt to have communicated to the finance ministry that such reactions should not be encouraged, since it projected the RBI as a personality-driven institution.

Rupee and bond markets have reacted adversely ever since reports came out that Rajan doesn’t want an extension of his term, on concerns that the central bank’s successful policies on curbing inflation and tough stance on banks’ balance sheets, may not be carried forward.

Rajan’s term ends September.

Highly-placed banking officials said it was unlikely that the governor would have actually written on the issue as it “would compound the matter even more.” Instead, he is likely to have mentioned it informally. “Why should the media speculate about the RBI governor’s re-appointment? When the right time comes, the FM (finance minister) and the PM (Prime Minister) will decide,” said one such official.

So far, the government has been non-committal about Rajan’s re-appointment. “I don’t think this administrative subject (Rajan’s re-appointment) should be an issue for the media. Besides, it will come up only in September.” Prime Minister Narendra Modi told Wall Street Journal last month.

Rajan, on his part, had said during a conference in London last month that he has “enjoyed every moment of the job, but there is more to do.”

A former Inter national Monetary Fund chief economist, Rajan has boosted India’s foreign exchange reserves to all-time highs and helped cut rupee’s swings by more than half since taking office in September 2013. He has also strongly advocated fiscal discipline, besides setting an inflation target.

He has cut the repo rate — the rate at which banks borrow from the RBI—by 150 basis points to 6.50% since January 2015. A repo rate reduces banks’ borrowing costs, and leads to lower interest rates for home, auto and corporate loan borrowers.

Most forex dealers that HT spoke to said the markets are likely to suffer from lack of confidence if Rajan is not reappointed. “The rupee will tank. He (Rajan) has brought predictability into the system,” one of the dealers said.

“It will be disastrous for the rupee and equity markets,” said Shankar Sharma, vice-chairman of securities firm First Global. “It will lead to a sharp fall in stock markets as the impact from a weak rupee will spread.”

The rupee has declined 1.4% in May, its biggest monthly loss since January, on speculation over Rajan’s extension. In the bond market, the yield on 10-year government bond rose two basis points to 7.48% on Friday, its highest close since March 30. The bond price weakened to Rs 100.67. Bond price and yield move in opposite directions.

Earlier this month, global brokerage CLSA’s managing director Christopher Wood had said that Rajan’s second term was essential to keep the rupee and bond markets stable.

“This is exactly what the governor does not want,” said the banking official cited earlier. “He does not want individuals to be above the institution.”

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