Raghuram Rajan does not want to serve a second term as the RBI governor, if a news report is to be believed. According to the news report in Anandabazar Patrika, Rajan has told the government that he doesn’t want to continue as RBI governor after his term ends in early September. The Bengali-language newspaper has quoted unidentified sources close to Rajan. The report however adds that PM Narendra Modi is keen to retain him in the post.
This comes amidst speculation on whether the NDA government will give the world renowned Rajan a second term. BJP leader Subramanian Swamy has lashed out at Rajan in the recent past, accusing him of “damaging the Indian economy” by holding interest rates for too long. Swamy has also written to PM Modi demanding that Rajan be sacked even before his term ends.
But Rajan is a darling of market experts, especially global investors, who have time and again lauded the RBI governor for his prudent policies and sound fundamentals. Many credit Rajan for tackling India’s double-digit inflation trouble and rupee crisis effectively.
Rajan took over as the RBI governor at a time when India’s inflation was above 10% and the Indian rupee was staring at a crisis. Not only did he hike rates to tame inflationary expectations, Rajan also took a number of steps to stem the rapid depreciation of rupee – opening a swap window for deposits from NRIs, being one of them. Come 2016, rupee is stable and inflation has reduced to sub-6% levels.
Cheering his appointment, stock markets had in 2013 reacted positively with the BSE Sensex surging 1,430 points, or 7.70, in four trading sessions. The index soared from 18567.55 on September 3, 2013 to 19,997.45 on September 11, 2013.
Since Raghuram Rajan took over as RBI chief, rupee has plunged marginally by 0.25 per cent to 67.20 against dollar on May 31, 2016 from 67.03 on September 4, 2013. During his tenure, the Indian currency touched a high and low of 58.43 on on May 19, 2014 and low of 68.78 on February 26, 2016.
So, how will the Indian markets and rupee react if Rajan does not return as RBI governor? Jamal Mecklai, MD & CEO of Mecklai Financial & Commercial Services expects the Indian rupee and markets to weaken if the above scenario does play out. “If Rajan does not serve a second term, whether by his own choice or the government’s, the rupee and markets would definietly weaken,” Mecklai told FE Online. “Not only that I think markets and rupee will also be more volatile. However, whether the negative impact will be long lasting is difficult to say. A lot of conditions affect markets, and it also depends on who replaces Rajan,” Mecklai added.
Gaurav Dua, Head of Research at Sharekhan believes that the impact of such a situation will be short-lived. “If Raghuram Rajan will not serve his second term then markets may react negatively for a short period, but things will be digested over a period of time. Overall, markets are not looking cheap after the recent run-up. We are sticking to private banks, auto, consumption plays,” Gaurav Dua told FE Online
DK Srivastava, Chief Policy Advisor at EY India also has faith in India’s domestic fundamentals and expects the negative reaction to be short-lived. “If Rajan does not do a second term at RBI, I am sure the Indian rupee and markets will witness immediate downwards pressure. This is also because globally Rajan’s policies are well accepted and investors have immense faith in him. However, eventually India’s domestic fundamentals will take over and the markets and rupee will find their balance,” Srivastava said.