Amid Raging Debate on Second Term for Rajan, Investors Keep Calm

Rajan’s appointment came in September 2013, as India faced its worst currency crisis in over two decades.

3 min read
RBI Governor Raghuram Rajan (Photo: Reuters)

The reappointment, or not, of Reserve Bank of India governor Raghuram Rajan has caused enough of a stir to be known locally as “Rexit”, a play on Britain’s EU referendum, reflecting the esteem in which the governor is held both in the country and abroad.

Were Rajan to leave when his tenure ends in September, Indian markets are expected to fall to reflect his standing, but some foreign fund managers are of the view that, even if he does go, it would not be the end of the world.

The main reason is that Rajan would leave behind policies that have altered the way the Reserve Bank works, namely the adoption of an inflation target and plans to create a monetary policy committee to set interest rates, bringing it closer into line with other big central banks like the US Federal Reserve.

The short answer is that investors, especially fixed income investors, will not be happy if he leaves, and it will surely trigger some sales. I think there is a more nuanced view, though, and unless he is replaced by a polar opposite character it may not matter that much.
Kieran Curtis, Investment Director - Emerging Market Debt, Standard Life Investments

But all may not be lost as reports last week indicated that with Prime Minister Narendra Modi behind Rajan, the central bank chief was more likely to be reappointed, despite considerable opposition to him within the ruling Bharatiya Janata Party (BJP).

  • Rajan steered India through one of its worst currency crisis in over two decades.
  • India has attracted $62 billion in foreign portfolio investments since Rajan’s appointment.
  • But investors say there is no reason why RBI cannot remain a credible institution without Rajan.
  • Possible replacements include RBI deputy governor Urjit Patel, SBI chief Arundhati Bhattacharya and economic affairs secretary Shaktikanta Das.

Emerging Market Darling

Rajan’s appointment in September 2013, as India faced its worst currency crisis in over two decades, and the election of Modi in May 2014, have helped turn India into an emerging market darling at a time when countries like Brazil and South Africa are struggling.

India has attracted $62 billion in foreign portfolio investments since Rajan’s appointment, including a yearly record of $42 billion in 2014, and the proportion of overseas ownership in debt and equity markets has hit record highs.

Rajan moved quickly to calm markets by raising short-term interest rates and pushing hard to shore up foreign exchange reserves, which hit a record $363 billion in recent weeks before dipping somewhat.


Setting Policy

India is also setting up a monetary policy committee that will decide interest rates, ending the current system under which the governor decides on policy and writes the statement.

Under a Bill passed by parliament, the panel would be composed of six members – three nominated from the central bank and three from the government.

The RBI governor would have the casting vote in the event of a tie, meaning the position retains significant influence, but the committee, which Rajan supports is expected to bring transparency to decision making and make the bank less reliant on a single person.

There is no reason why anyone should assume that the RBI cannot remain a credible institution. Sensible foreign investors will understand that, with or without Governor Rajan, India has the ability to realize its tremendous potential, but it will take time.
Kenneth Akintewe, Fund Manager, Aberdeen Asset Management 

Were Rajan to step down, other candidates would struggle to match his pedigree as former chief economist at the International Monetary Fund and one of the few who predicted the 2007-08 global financial crisis.

But Urjit Patel, a deputy governor at the RBI, has been named by some analysts as a plausible replacement. Other names mentioned in the market include Arundhati Bhattacharya, head of India’s biggest lender State Bank of India and economic affairs secretary Shaktikanta Das.

Nevertheless, Rajan would still remain many investors’ favoured choice.

“In our conversation with investors, there is no question that people would feel more reassured about their investments if Governor Rajan remained in office, so it is certainly a risk factor,” said Kamakshya Trivedi, chief emerging markets macro strategist Goldman Sachs in London.

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