India’s central bank head Raghuram Rajan to step down

Raghuram Rajan, India’s “rock star” central bank governor, has announced that he will step down after just one three-year term.

Rajan, a former chief economist at the International Monetary Fund who famously predicted the 2008 global financial crisis, is held in high esteem by policymakers and investors at home and abroad for overhauling the way the Reserve Bank of India (RBI) operates.

He has been credited with bringing stability to India’s economy since his appointment as the RBI’s head in September 2013.

But he has faced mounting criticism from a faction within Narendra Modi’s ruling BJP party for keeping interest rates high and over a perception that he had begun to stray into politics.

Raghu has been one of the finest central bank governors anywhere.https://t.co/XRERx0ab8i

— Kaushik Basu (@kaushikcbasu) June 18, 2016

In a letter to RBI staff on Sunday, Rajan said he planned to return to academia, even as he noted two of his actions – the creation of a monetary policy committee to set interest rates and the clean-up of the heavily indebted banking sector – remained unfinished.

“While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as governor ends on Sept. 4, 2016,” Rajan wrote.

“I will, of course, always be available to serve my country when needed.”

A senior government official told Reuters news agency there were seven candidates on an initial long list to replace Rajan.

‘Rexit’ rumours

While there had been some speculation that Rajan might not stay for a second term – dubbed “Rexit” in a nod to Britain’s vote on European Union membership – government officials said they were surprised by the timing and manner of the announcement.

An online petition for him to stay had tens of thousands of signatures.

“I am an academic and I have always made it clear that my ultimate home is in the realm of ideas,” Rajan, a University of Chicago professor, said in the letter to RBI staff.

His departure is likely to affect markets on Monday, analysts say, at a time when global factors such as Britain’s referendum on European Union membership are already in play.

Hailed as a “rock star” and “James Bond” by India’s media in September 2013, Rajan took over the reins at a time when India’s economy was struggling with a widening current account deficit, a falling currency and stagnating economic growth.

Rajan has successfully taken aim at inflation, bringing it down from double-digit levels to 5.8 percent currently. And India’s economy expanded by 7.9 percent in the fourth quarter of 2015-16, the fastest of any major economy.

“The government appreciates the good work done by him and respects his decision. A decision on his successor would be announced shortly,” Arun Jaitley, India’s finance minister, said on Twitter on Saturday.

‘Not fully Indian’

Rajan was known to have a good working relationship with the Indian prime minister, who called the RBI governor a “good teacher” on economic matters.

Many of Rajan’s key accomplishments have come in close collaboration with the Modi government. Rajan pushed for inflation-targeting to tackle India’s history of volatile prices, which was then made law by the government last year.

However, in recent months Rajan had faced strident criticism from Hindu nationalist members of BJP, including Subramanian Swamy, a parliament member who has waged a campaign against his economic policies.

The Government appreciates the good work done by him and respects his decision. A decision on his successor would be announced shortly.(2/2)

— Arun Jaitley (@arunjaitley) June 18, 2016

Swamy, a former Harvard economist, expressed his delight on Twitter that Rajan “has said he will go back to US. Whatever fig leaf he wants for hiding the reality we should not grudge it. Say goodbye!”

Swamy had described Rajan as “mentally not fully Indian”.

P Chidambaram, the Congress Party finance minister who appointed Rajan, said he was profoundly saddened by the decision.

“I am not surprised at all. The government had invited this development through a craftily planned campaign of insinuations, baseless allegation and puerile attacks on a distinguished academic and economist,” he said on Twitter.