In declaring that he will not seek a second term after his first ends in September, Reserve Bank of India Governor Raghuram Rajan has chosen the best and most dignified way out of a situation that was getting increasingly ugly. Over the last few months, his ‘extension’ became the subject of fevered speculation as it became increasingly apparent that sections within the Modi government were uncomfortable with his continuance. The complaints against Mr. Rajan varied — they included the relatively trifling (his choice of words and plain-speaking ways), the debatable but substantive (his unwillingness to lower interest rates despite stable macro-economic indicators), and the indisputably ridiculous (his alleged lack of commitment to India). The last, coupled with the Centre’s decision to form a search panel to select all financial sector regulators, could have nudged Mr. Rajan to rule himself out of the race two and a half months before his term ends. In doing so, he has saved the Centre from the possible repercussions that a refusal to grant a second term could have had. After all, the RBI Governor has an enormous amount of credibility with international investors (the impact of his exit on foreign portfolio flows will be keenly watched), and he has earned himself the reputation of having skilfully managed the country’s currency, inflation and foreign exchange reserves in a faltering world economic climate.
On monetary policy, the Centre’s uneasiness stemmed from what it believed was an important reason for the economy not taking off as fast as it could have. The slow pace of interest rate cuts, a result of what Mr. Rajan saw as fresh or rising inflationary pressures, is on that list; but although the RBI has cut rates by 1.5 percentage points since 2015, private investments are still moribund. The central bank’s crackdown on the evergreening of loans, forcing banks to acknowledge bad loans rather than throw more good money after bad, has led to record losses across the public sector banking system. This has been another source of friction. By ruling himself out for a second term, Mr. Rajan has brought down the curtain on the unfortunate and unpleasant politics around his continuance. In choosing his successor, the Centre must remember that the central bank, by its very remit, is concerned about inflation and that the country needs a Governor with enough independence and authority to maintain a balance between the aspirations for growth and the concern about rising prices; it is also imperative that the new central bank chief has a free hand in charting a course to fix banks’ books so that they can begin lending again. A rubber stamp for rate cuts won’t do, and it is not such a bad thing if a healthy tension exists between the Reserve Bank of India and the Finance Ministry. As Mr. Rajan himself once said, if the two always agreed, the public should be very worried.