Raghu­ram Ra­jan tamed In­dia’s in­fla­tion, but he was no match for its politics

With Raghu­ram Ra­jan gone, in­vestors worry re­form will suf­fer “Po­lit­i­cal pres­sures may have con­trib­uted to his de­par­ture”

Bloomberg Businessweek (Asia) - - CONTENTS - Unni Kr­ish­nan, San­drine Rastello, Luke Kawa, and Peter Coy

Raghu­ram Ra­jan said on June 18 he’ll re­turn to the Uni­ver­sity of Chicago Booth School of Busi­ness when his three-year term as gover­nor of the Re­serve Bank of In­dia (RBI) ex­pires on Sept. 4. Prime Min­is­ter Naren­dra Modi had failed to de­fend Ra­jan strongly when an in­flu­en­tial mem­ber of Modi’s party said Ra­jan was “will­fully and de­lib­er­ately wreck­ing the In­dian econ­omy” and was “men­tally not fully In­dian.”

Ra­jan raised in­ter­est rates three times after be­ing ap­pointed by the pre­vi­ous gov­ern­ment in 2013. As in­fla­tion eased, he cut rates more slowly than some in Modi’s party wanted. In­vestors are ner­vous that In­dia’s next cen­tral banker won’t press as hard as Ra­jan to cut in­fla­tion and force banks to clean up their bad loans. “The fact that po­lit­i­cal pres­sures may have con­trib­uted to his de­par­ture” clouds the out­look, Deepali Bhargava, an econ­o­mist at Credit Suisse, wrote to clients.

Modi’s gov­ern­ment sent in­vestors mixed sig­nals in the days after Ra­jan’s an­nounce­ment. Try­ing to show pol­i­cy­mak­ers were still pro-re­form, the gov­ern­ment said it would al­low 100 per­cent for­eign in­vest­ment in sec­tors from lo­cal air­lines to ca­ble-TV providers. The an­nounce­ment gave some sup­port to the ru­pee, which slipped to a onemonth low on June 20.

On fight­ing in­fla­tion and fix­ing the banks, the gov­ern­ment hinted that

Ra­jan had gone too far. A se­nior gov­ern­ment of­fi­cial told re­porters that the high rates Ra­jan has used to fight in­fla­tion, while ap­peal­ing to for­eign­ers, were hurt­ing do­mes­tic in­dus­try. The gov­ern­ment also sug­gested the RBI’s own cap­i­tal could be used to bol­ster state-owned banks grap­pling with non­per­form­ing loans, ac­cord­ing to a doc­u­ment ob­tained by Bloomberg on June 20. Tap­ping the RBI’s cap­i­tal might jeop­ar­dize its in­de­pen­dence. Al­pana Killawala, a spokes­woman for the RBI, didn’t re­spond to an e-mail.

Arvind Subra­ma­nian, chief eco­nomic ad­viser to the Min­istry of Fi­nance, is Ra­jan’s most likely suc­ces­sor, ac­cord­ing to a sur­vey of econ­o­mists by Bloomberg. He is less hawk­ish on re­duc­ing in­fla­tion than Ra­jan. But his can­di­dacy could be jeop­ar­dized by his close ties to the U.S. In 2013 he told Congress that the U.S. should ad­dress In­dian poli­cies that are “demon­stra­bly pro­tec­tion­ist.”

“The real hard work starts now” on the in­fla­tion front, says Sonal Varma, an econ­o­mist at No­mura Hold­ings in Sin­ga­pore, cit­ing a loom­ing pay raise for civil ser­vants and ris­ing fuel prices. As for the banks, wrote Ben You Ang and David Mar­shall, an­a­lysts at re­search firm Cred­itSights: “The de­par­ture of Mr. Ra­jan as head of the RBI will in­evitably be seen as a blow to the re­form of the sec­tor.”

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