Saturday, June 18, 2016

Head Of India Central Bank Unexpectedly Announces Intention To Leave

In many ways, Reserve Bank is India's version of Paul Volcker.
When the former IMF chief economist took over the reins of the Reserve Bank of India in September 2013, the rupee was plummeting and inflation was at double-digit levels. Since then he has waged a determined battle against India’s spiralling prices, persuading New Delhi to adopt a formal inflation-targeting framework for its once ad hoc monetary policy. Inflation, nearly 11% in 2013, tumbled to 5.8% last year (helped by plunging oil prices), succeeding in not only stabilizing the rupee and the local stock market, but making India the world's fastest growing major economy, overtaking China.
Furthermore, Rajan has been a central banker cut from a different cloth than most of his peers: unlike Yellen, Draghi, Kuroda et al, Rajan's frequent warnings about the state of the global economy, about asset bubbles and the shortcoming of unconventional monetary policy, have served as a welcome indicator that at least some of the world's most powerful economists are not utterly clueless (a topic discussed by Citigroup just yesterday).
However, Rajan's determined fight with inflation courtesy of high rates also set the seeds for his own destruction.
As the FT wrote in May, "to many international investors, the Reserve Bank of India governor Raghuram Rajan is a near-hero — the articulate, market-savvy central banker who tamed India’s inflation, restored its macroeconomic stability and is driving a banking system clean-up. But admiration is not universal. Many Indian businessmen are frustrated that interest rates have not fallen faster. Some tycoons are unhappy with growing pressure to repay their overleveraged companies’ debts to ailing state banks, despite tough economic times."
Ironically, political sentiment against Rajan - the man who saved India's economy in 2013 - was rising to the point where many suspected he may simply leave when his term expired in September.

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