On Saturday, Raghuram Rajan, the governor of the Reserve Bank of India (RBI), India’s central bank, announced he will not be seeking a second term in September. Rajan, in a letter to RBI staff, said he intended to return to academia:
I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished. …. While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016. I will, of course, always be available to serve my country when needed.
Rajan’s announcement that he will leave the RBI doesn’t come entirely as a surprise, but will nonetheless give investors a jolt. Under his tenure, which began under the previous United Progressive Alliance-led Indian government, the Indian economy managed to largely bring inflation into check and weathered economic storms that slowed overall growth rates in other large global emerging economies, including Russia, Brazil, and even China. Rajan, in his letter, noted the success of the RBI’s inflation-sensitive approach to monetary policy, which he said benefited Indian savers and improved the government’s fiscal position. (The Business Standard has a more detailed catalog of Rajan’s monetary policy accomplishments.)
Technocratic chops aside, Rajan also made headlines in India for his tendency to speak truth to power on issues like corruption. In 2014, he openly expressed his distaste for “venal politicians” and crony capitalists, which he regarded as a major source of deadweight loss for the Indian economy. Last year, Rajan called for academic freedom and the free expression of ideas in India, citing these as “critical for [India’s] economic progress.”
The reasons for Rajan’s departure are complex, but they involve both political and structural factors. Several Indian commentators have already noted the recent acerbic intra-Bharatiya Janata Party (BJP) debate on the governor’s character. In late May, Subramanian Swamy, a Rajya Sabha legislator, penned a conspiratorial letter to Prime Minister Narendra Modi that effectively insinuated that Rajan was a foreign agent working against Indian interests. The letter went as far as to declare the governor “mentally not fully Indian,” citing his U.S. permanent residency and continued affiliation with the University of Chicago, the institution he’ll return to in September.
Accordingly, after news emerged of Rajan’s plans to leave the RBI, Swamy expressed his contentment: “Was he getting a 2nd term in the first place? If he says he wants to go, I’ve no problem. Let him pretend that he is giving up and going. As long as he is going, it is good,” he told ANI.
Swamy’s posturing wasn’t empty politicking, borne of a paranoid legislator’s conspiratorial thinking–it had real effects on Rajan’s decision and the wider discourse on the RBI governor. International investors balked at the idea of Rajan walking away from the RBI. Unfortunately, their fears came true as Swamy’s assault on Rajan’s credibility went unchecked by the government.
Swamy’s onslaught appears to be just part of the story in Rajan’s decision to leave the RBI, however. As Vivek Law outlines in more detail over at Quartz, creeping structural changes to the RBI’s governance and policy-making apparatus may have also eroded Rajan’s interest in staying on. Despite having Modi’s backing, the writing on the wall was clear: the RBI governor’s powers would be scaled back considerably and subject to political interference. Law speculates that Rajan may have even considered the possibility of interviewing for his own job before a government panel, potentially facing rejection anyway.
Broader change is afoot at the RBI. As I’d discussed recently in The Diplomat, Indian legislators have been keen to dilute the Reserve Bank governor’s authority, a move that Rajan didn’t oppose–in fact, he’s been rather supportive of the endeavor, noting that it would bring India’s monetary policymaking into line with global best practices. Going forward, Indian monetary policy will likely be subject to the oversight of a six-member panel, which would be tasked with making interest rate decisions. This arrangement isn’t entirely unusual in the world of central banking; in the Indian context, the body would comprise three representatives of the government, three representatives of the RBI including the governor (who would have tie-breaking power). Indeed, these changes will lessen the importance of having a single brilliant technocrat at the apex of the monetary policy portfolio in India, leaving Rajan’s departure less of an economic blow.
While the factors underlying Rajan’s decision to leave are complex, but what’s less so is the message the Modi government is sending international investors with this event. When Modi and company came to power in 2014, investors rejoiced at the prospect of having an Indian leader who recognized the value of hard-nosed, empirically minded technocrats. More than any other person in the Indian government, Rajan embodied that sort of technocratic outlook–even though he had been inherited from the previous UPA government led by the Congress Party’s Manmohan Singh.
For Rajan to leave now, in the aftermath of the ignominious and frankly unhinged campaign led by Subramanian Swamy, suggests to investors who held on to some hope that Modi’s plans to right India’s economic trajectory would be insulated from political headwinds that their hopes may have been misplaced. Rajan’s successor is likely to be capable and competent and India’s economy will likely weather this incident (even if Indian markets are expected to react negatively as markets open on Monday). But, longer term, that Swamy, in all his paranoia, triumphed over Rajan, won’t speak well to the Modi government’s ability to steward a robust economic technocracy in the face of good old-fashioned politics.
Correction: A previous version of this article stated that the new Indian monetary policy committee would have seven members. Per the 2016 Finance Bill, the committee will comprise six members, including the RBI governor.