As India seeks a new Reserve Bank of India
(RBI) chief, many investors are pushing a clear message: the successor to
Raghuram Rajan may lack his gravitas, but must defend the Reserve Bank of
India's autonomy at a critical juncture in its history.
Under
Rajan, who unexpectedly announced on Saturday he would step down when his
tenure ends in September, the RBI has started to institutionalise its
decision-making and reduce the power of the governor, including through the
introduction of an inflation target that will guide monetary policy decisions.
But
Rajan's announcement, in a letter to staff, has spread confusion and stunned
RBI and government officials.
It also
follows strident criticism of Rajan from right-wing members of Prime Minister
Narendra Modi's Bharatiya Janata Party, prompting investors to ask whether
politics played a role in his departure.
That is
putting the question of the RBI's autonomy front and centre, especially as
Rajan may not get to see through the next plank of his reform plan - the creation
of a monetary policy committee to set interest rates, which was passed into law
last month but whose final composition has yet to be announced.
The RBI
is not statutorily independent from the government but has long enjoyed wide
latitude.
"The
choice of successor must be based on finding a leader that will continue the
new monetary project, targeting lower inflation," said the head of
portfolio management for emerging Asia at PIMCO, Luke Spajic, who sees finding
the right mix of experience, deft thought leadership and personal charisma that
satisfies all camps as a daunting challenge.
India can ill afford to pick wrong or drag its
feet on a replacement. It has attracted more than $60 billion in foreign
portfolio investments since Rajan's appointment in September 2013 and some
investors could start getting skittish.
"Investors
abhor vacuums, especially at central banks," said Spajic.
POLICY
CONTINUITY
Deputy
Governor Urjit Patel is currently seen as a top contender, a decision that
would likely mollify investors because he penned the report that laid out
recommendations for the new monetary policy framework adopted by Rajan.
The
final decision is expected to be taken by Modi himself, and a source close to
the Prime Minister said an independent successor would be picked.
"He
(Modi) does not want to give the job to a conservative economist, and clearly
wants an independent thinker. The new governor will not be a puppet in the
hands of the government," he told Reuters.
Nonetheless,
questions linger as India transitions to letting a new monetary policy
committee set rates.
Under
the current six-member structure agreed by Rajan and the government and written
into law, three members would come from the RBI, including the Governor. The
other three will be nominated by a government panel although the Governor would
have a say in the selection.
However,
the Governor would have the tie-casting vote in monetary policy decisions,
meaning Rajan's successor would face more pulls and pressures.
Still,
a senior policy maker who works closely with Rajan said all RBI governors have
ultimately proven to be independent as they conform to an institution that has
long taken pride in its autonomy.
"It
is the chair (of the RBI Governor) which is the prime driver, not who employs
you," he said.
Representative
Image
Source: Reuters
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