In an eventful week during which the world will watch Britain’s vote on whether it would stay in Europe or not, one thing that India’s uneasy markets could have done without was a local factor that added to the uncertainty. But then came RBI governor Raghuram Rajan’s sudden weekend announcement that he will not seek a second term after his tenure ends in early September. It should have been a Monday of Mayhem as ‘Brexit’ would have been compounded by the ‘Rexit’ factor as Mr Rajan’s exit was perceived to be. However, with both the rupee and stock indices holding steady on Monday, there is hope yet that India’s economy will survive short-term shocks. Deeper questions hang in the air: Are individuals more important than institutions? Can the central bank be the prime agency in determining the fate of the world’s fastest growing major economy amid forecasts of a good monsoon after two years of drought?
The answer thus far seems to be that India can overcome short-term hiccups and perception problems, thanks to its fundamental strengths. It is important to understand Mr Rajan’s policies as a product of the circumstances under which he took over his job. Battling local inflation amid the world’s worst recession since the Great Depression of the 1930s was a challenge for both him and his predecessor, Duvvuri Subbarao. We may sound some ifs and buts on how harsh his policies should have been or not with regard to the mountain of bad loans (non performing assets) that India’s commercial banks were stuck with, but if he had not tried a tough clean-up, he might have been seen as erring on his own principles. This is the man who as IMF’s chief economist argued a decade ago that risky instruments were polluting global finance – and thus predicted the global crisis of 2008. Looking back, he has brought inflation under control, and has cut interest rates over the past year by 1.5 percentage points. His safety nets for the rupee are also justifiable as export markets have not been sound and oil prices continued to rule high until early this year.
A lot would now depend on whom the Modi government names as Mr Rajan’s successor. On current indications, it does not seem to be in a hurry to do so and may wait until the end of August. That is an uncertainty the economy could do without. We hope the successor is named sooner and would be a credible figure who can please domestic businesses and foreign investors alike. Both the government and RBI need to move fast to end the long-drawn crisis of non-performing assets (NPAs) keeping India’s public sector banks in limbo or worse.