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Government to take call on Rajan's extension in August

Subramanian Swamy's letter to PM complaining about the RBI governor would not impact decision

Policy Pulse
Publish Date: May 23 2016 4:02PM | Updated Date: May 23 2016 4:06PM

Government to take call on Rajan's extension in August

The government hasn't yet applied its mind to the matter of extending Raghuram Rajan's tenure as Reserve Bank of India governor and is only likely to decide on this in August, a month before his three-year term ends, a senior official told. 


Subramanian Swamy's letter to Prime Minister Narendra Modi complaining about the governor and arguing against an extension won't have any impact on the decision, the person said, adding that neither will Rajan's global status as a star among central bank governors and economists. 


The government acknowledges Rajan's role in heading a strong regulator and forcing banks to crack down on bad loans but it clearly doesn't see his policy as having been accommodative enough. "Rajan's position on interest rates has not been in sync with the expectations of the government," the official said. His role in preparing the Budget was exaggerated, although his inputs had been sought on issues that concerned the RBI, officials said. 


"For instance, Rajan was of the firm view that we should not relax the fiscal deficit target in the Budget," said one of them. While there were some who felt this could be relaxed, the Prime Minister too was of the view that the government should stick to it, he said. 


Incidentally, the prime minister and the governor meet once every quarter and no one else is present at these meetings. Rajan was appointed by the previous United Progressive Alliance (UPA) government for a three-year term beginning September 4, 2013, at a time when India's macro-economic fundamentals were in poor shape with the current account deficit at a record high, zooming inflation and concerns about fiscal targets being missed. These indicators are in much healthier shape now. 


Swamy, who recently became a BJP member of the Rajya Sabha, has said the RBI governor is "mentally not fully Indian" and accused him of an "apparently deliberate attempt to wreck the Indian economy". Rajan, who's on leave from the University of Chicago Booth School of Business, still has his US Green Card, although he retains his Indian citizenship. 


Other BJP members including ministers have latched on to Rajan's statements that India's economic progress should not be blown out of proportion given the parlous state of the global economy — likening it to a one-eyed man being king in the land of the blind — when the government has been hard-selling the country's growth. India is the fastest-growing major economy, having overtaken China, according to the International Monetary Fund. 


Some of Rajan's other statements have also been seen as exceeding his remit as RBI governor. 


Officials cited above confirmed that there has been no discussion on Rajan's term and that the current government does not begin such deliberations so early. "These decision are taken much closer (to the date), and reached quickly," one official said. 


The RBI has cut the repo rate, the key policy rate, by 150 basis points since January 2015, but the government, under pressure to hasten economic growth, had wanted the pace of easing to be faster and sharper. Many Indian economists have also said that Rajan should have been faster with rate cuts. The payment of surplus to the government has also been a thorny issue between the government and RBI in the past. 


That and differences over the monetary policy committee's composition had badly dented the relationship between Mint Street and North Block. The two seem to have mended ties over the past year though. 


The first official cited above said the government is aware of Rajan's international standing and the comfort his presence provides to investors, but that will not play a role in deciding whether he gets an extension. "In the past, people like YV Reddy and Bimal Jalan have performed the role with great distinction and there is nothing to show that homegrown talent would be in any way inferior," he said