Raghuram Rajan May Get a Term Extension, After All

Rajan’s extension seems imminent because the global opinion appears to suggest that it would provide much needed stability to the domestic financial system

File photo of Raghuram Rajan. Credit: PTI

File photo of Raghuram Rajan. Credit: PTI

Ignoring the psychological games being played by politicians in New Delhi, to force the Reserve Bank of India (RBI) to cut interest rates more rapidly, governor Raghuram Rajan stuck to his conviction that further monetary easing would have to wait till fresh inflationary pressures, especially in food items, abated. Overall, he maintained an accommodative stance and argued that a good monsoon and adequate food supply management efforts by the government could provide opportunity for a rate cut in the future.

As the RBI governor made his policy statement, the shadow of the unseemly controversy over demands within a section of the BJP for his replacement just would not go away. In fact, Rajan came with a prepared statement which made light of the matter pertaining to his possible extension after 4 September, when he completes his three-year tenure. He said, “It would be cruel of me to spoil the fun the press is having speculating whether I will continue.”

He then took a mild dig at the BJP Rajya Sabha MP, Subramanian Swamy, saying, “I am personally intrigued by all the letters I am supposed to have written… ” Swamy had been referring to letters and emails purportedly written by Rajan to the US authorities with regard to his past employment in America.

The RBI governor hinted that the matter regarding his extension would obviously be decided by the finance minister and the prime minister after consultations with him. However, if one read between the lines, especially of finance minister Arun Jaitley’s public pronouncements, it appears that Rajan would get another two years, just as the four previous RBI governors. The finance minister has also privately spoken in favour of Rajan getting an extension.

Rajan’s extension seems imminent because the global opinion appears to suggest that an extension to the RBI governor’s tenure would provide much needed stability to the domestic financial system and currency. Many Indian expat bankers working in Singapore, London and Hong Kong have openly said that the currency markets are a bit nervous about the speculation that Rajan may leave after 4 September.
They credit Rajan with having managed the rupee with the least volatility over the past three years. Indian currency has been among the two or three least volatile currencies in all emerging markets. Experts give Rajan a lot of credit for smoothing the ebbs and flows in the currency markets when the global capital flows and trade had declined precipitously in recent years.

Another reason why the prime minister may give Rajan an extension is because the currency market in the last quarter of 2016 is expected to be somewhat shaky as $20 billion of dollar borrowings by Indian banks from NRIs is coming up for redemption after September. These borrowings from NRIs were facilitated by the RBI under Rajan in 2013, when India’s currency was under severe strain and the exchange rate had crossed Rs 68 to a dollar. Coincidentally, those very dollar borrowings from NRIs are being redeemed even as Rajan’s first three years are about to get over. And the exchange rate of the rupee has been a bit weak, of late.

In his policy statement on Tuesday, the RBI governor did hint that the central bank would do everything to help in the redemption of the NRI dollar deposits with the banks. Banks will need to accumulate dollars to pay back the NRIs. But Rajan also let slip a hint that banks should not take RBI help for granted. There was a suggestion that some banks may be a bit shaky about their ability to pay back the NRI deposits, which are about to mature this year. All this would coincide with other global events like the US Federal Reserve possibly raising the interest rate after October and the global uncertainty on account of Brexit. If this is true, then New Delhi may just decide to let Rajan take care of some of these problems, which may arise later this year. The logic being – you don’t let go of a person with Rajan’s record in such turbulent times globally.

  • ashok759

    Dr. Rajan richly deserves a second term. It would be a good idea to lay the hurtful speculation to rest by making an early announcement.