NiftyforAll: Weekly Review - 20th June, 2016

Saturday, June 18, 2016

Weekly Review - 20th June, 2016

Dear All,

>>> REXIT <<<

India's "rock star" RBI Governor Raghuram Rajan, feted by foreign investors but under pressure from political opponents at home, stunned government officials and colleagues on Saturday by announcing he would step down after just one three-year term.

Rajan, a former chief economist at the International Monetary Fund, is held in high esteem by policymakers and investors at home and abroad for overhauling the way the Reserve Bank of India (RBI) operates.

But he has faced mounting criticism from a faction within Prime Minister Narendra Modi's ruling party for keeping interest rates high and over a perception that he had begun to stray into politics.

In a letter to RBI staff, Rajan said he planned to return to academia, even as he noted two of his actions - the creation of a monetary policy committee to set interest rates and the clean-up of the heavily indebted banking sector - remained unfinished.

"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 Sept. 4, 2016," Rajan wrote.

"I will, of course, always be available to serve my country when needed."

It will be the first time since 1992 that an RBI governor has departed after a single three-year term.

That the larger Sangh Parivar was unhappy with Reserve Bank of India (RBI) Governor Raghuram Rajan for his views on issues such as “intolerance” was no secret. The die was cast when Subramanian Swamy, a Rajya Sabha member from the Bharatiya Janata Party (BJP), wasn’t reined in when he went as far as calling Rajan’s policies “anti-national in intent”. There were also severe difference of opinion between Rajan and those in the government, including in the Finance Ministry bureaucracy, on the RBI’s monetary policy, particularly on the issue of the central bank’s refusal to lower interest rates.

People in the government and industry had complained about Rajan’s obstinacy in not reducing interest rates, especially when the oil import bill was low and other macro-economic indicators were suitable. Those in the government and industry were looking at the RBI to reduce interest rates to spur growth in real estate and the MSME sector. A spurt in these two sectors, or so it was argued, would have contributed to job growth – one of the principal planks of Prime Minister Narendra Modi’s 2014 Lok Sabha campaign.

But the equity market may only see collateral damage. The biggest hit, experts believe, will be on the currency market, which is already bracing for some major risks in the coming months.

"If Rajan is not continuing, the biggest risk will be to the Indian bond and currency Markets," Christopher Wood said in the Fear and Greed report back in May.

The biggest issue would be the redemption of the Foreign Currency Non-Residential (FCNR) bonds issued by Governor Rajan back in October 2013 to protect the rupee from its worst crisis in decades.

Those bonds are due for redemption and the currency market is due to face an outflow of $20 billion, which will put intense pressure on the rupee.

However, according to one source privy to the Rashtriya Swayamsevak Sangh (RSS), the BJP’s ideological parent, and also the government’s views on economic issues, the departure of Rajan from the RBI is an end to “outside interference” in policy making. The RSS might exult at Rajan's exit as its triumph but the source said Rajan’s views on intolerance were only the last straw. The source likened his exit to one of the first decisions of the Narendra Modi government – that of kicking out 350 consultants who during the UPA years advised the government on various issues of planning and policy making. Another source went as far as to say that Rajan demoralised government owned banks and destroyed the economy, and his departure was a signal to crony capitalists supported by the previous UPA government.

In his first comments after the development, Finance Minister Arun Jaitley said the government respected Rajan’s decision and a successor will be appointed soon. State Bank of India chief Arundhati Bhattacharya is being looked at as a possible candidate.

There are seven candidates on a long list to replace Reserve Bank of India Governor Raghuram Rajan, a senior government official told Reuters on Saturday.

The candidates are Vijay Kelkar, Rakesh Mohan, Ashok Lahiri, Urjit Patel, Arundhati Bhattacharya, Subir Gokarn and Ashok Chawla, the official said, speaking on condition of anonymity due to the sensitivity of the matter.

Of the field, the two best known are Patel, now a deputy governor of the RBI, and Bhattacharya, who is chair of State Bank of India, the country's largest bank

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