Reserve Bank of India Governor and former chief economist at the IMF, Raghuram Rajan announced that he would not be seeking an extension on his term on Saturday and predictably it has caused panic in financial circles in India, which remains the fastest growing economy in the world. Mr. Rajan wrote a letter to his colleagues at RBI which was later shared with the media as months of speculation regarding his extension came to an end. His departure comes after a fruitful tenure during which he launched a major clean up of state owned banks and also went after big ticket corporate defaulters, while on the other hand refusing to reduce interest rates. According to many, his policies, particularly with regards to interest rates did not please the ruling dispensation.
A report on Financial Times states, "The clean-up of bank balance sheets is the next key task for the RBI. This will require public funds to recapitalise the banks but also changes to their incentive and governance structures. Damaged bank balance sheets have constrained their ability to lend and support economic activity. Not having a strong central bank governor who understands banking and can stand up to the political pressures - from bankers and those eager to maintain the status quo - could stymie progress."
However, even more tellingly, the report went on to add, "The change at the RBI's helm exposes India to negative investor sentiment at a time of global economic uncertainty. The country is now in a better position to withstand external turmoil than when Mr Rajan took office. India has a large stock of reserves, has shown that it can cope with exchange rate volatility and needs less foreign financing as its current account deficit has shrunk. But all of this can turn on a dime. A sequence of shocks beyond India's control, coupled with investor nervousness about the course of economic and financial policies, may stoke capital outflows." The opening bell on Monday would certainly show the mood of the market but India might end up being an unattractive investment destination for big ticket foreign institutional investors.