RBI Governor Raghuram Rajan, who said no to a second term on Saturday, has ensured during his tenure that rupee remains stable and pressure on the bond market wanes off. In a letter to his staff on Saturday he made his future plans clear of returning to academia.
Rajan also said he was proud of contaning the inflation which has been halved in his tenure and stabilizing the Indian currency. further added that
“I feel proud that we at the Reserve Bank have delivered on all these proposals. A new inflation-focused framework is in place that has helped halve inflation and allowed savers to earn positive real interest rates on deposits after a long time. We have also been able to cut interest rates by 150 basis points after raising them initially. This has reduced the nominal interest rate the government has to pay even while lengthening maturities it can issue – the government has been able to issue a 40 year bond for the first time. Finally, the currency stabilized after our actions, and our foreign exchange reserves are at a record high, even after we have fully provided for the outflow of foreign currency deposits we secured in 2013. Today, we are the fastest growing large economy in the world, having long exited the ranks of the Fragile Five,” Rajan said in his letter.
Rajan took over as the RBI governor at a time when India’s inflation was above 10 per cent and the Indian rupee was considered as a part of the unenviable club of fragile 5. He raised the rates to contain inflationary expectations amd also took a number of steps to control rupee’s depreciation like opening a swap window for deposits from NRIs.
Indian rupee nosedived by 61 paise to 67.69 against the US dollar in the opening trade on Monday after RBI Governor Raghuram Rajan said no to a second term in the post. Indian rupee before his announcement came closed 3 paise higher at 67.17 against dollar, according to RBI data.
Experts have mixed view on Raghuram Rajan’s surprise disclsoure on tenure. Anindya Banerjee, currency analyst, Kotak Securities, feels Rajan’s exit would add to Brexit worries for India currency and it may slide to 67.50 levels. He said,” With risk of Brexit over the horizon the departure of a governor adds to the uncertainty. We may see decline towards 67.50 levels on spot. However, sovereign support for rupee would keep things at a check. Market would also weigh in the new appointment. Bonds could also see some downside pressure, as 10 year yields can move towards 7.60 per cent.”
Banerjee further added, “Rajan took over when Indian currency was considered as a part of the unenviable club of fragile 5, but when he is leaving, rupee is one of the best performing currencies. Indian bonds which were under pressure due to loss of control on inflation, crossed above 9 per cent but now they have come-off towards 7.5 per cent. Inflation is under control. For the first time, RBI has formalised an anchor for the rupee which has provided stability. They have officially targeted real rates and kept it positive which is a major supporting factor for the rupee.”
However, there are others who disagree and feel that Rajan has got more credit than due. Rajan’s ‘Rexit announcement will have a knee-jerk reaction on the markets, but economy and rupee will not face much of a problem, said Samir Lodha, MD-QuantArt Market Solutions Pvt. Ltd. He said,”Rajan has been a focused and bold governor and pursued policies he believed in. He has been a resolute leader however apart from knee-jerk reaction, I don’t see much problem for the economy. Rupee and inflation is steady more because of commodity price softening and low rates of developed world. Rajan has got more credit than due.”
He further elaborates that the high interest rates in India made it very difficult for domestic companies to do business and banking sector saw stressed assets. When Rajan took over, currency market already was steady thanks to comments from Bernanke. However, Indians credited Rajan for the same.
It will be clear in coming days as who will replace Raghuram Rajan as RBI governor after September but any announcement on this will be weighed by the stock markets.
Lodha, however, credited Rajan’s effort to clean up the banking system and his bold stances.