RBI Governor Raghuram Rajan’s decision to return to academia and not accept a second term may have been firmed up last month after being “hurt” by the government’s muted condemnation of BJP MP Subramanian Swamy’s personal attacks on him and the feeling that Swamy’s actions had tacit support from within the establishment, according to those close to Rajan.
After Swamy launched his attack early May saying Rajan had wrecked the economy with his interest rate policy and inflation management and then said that the RBI chief was not fully mentally Indian, one of the few who spoke to him immediately was Union Finance Minister Arun Jaitley.
But a perceived lack of strong condemnation of Swamy’s actions — a rare personal attack on a serving central bank chief or a defence of Rajan by the establishment — fuelled suspicion about the timing of the attack and the method adopted, prompting associates and close family friends to suggest that Rajan return to University of Chicago Booth School of Business from where he has been on leave for three years.
What added to the unease before that were indications that at least three to four Cabinet ministers were hostile and quite critical of him in private for his stewardship of the RBI, especially for not cutting interest rates aggressively — soon after coming to power, the party had indicated that rates would move south. “There were many vested interests at play given the stake of many industry chaps,” a person close to Rajan said.
But there seemed to be no respite after Swamy launched his latest attack in which he demanded a CBI probe into the grant of licences by RBI for small and payment banks. Earlier, Rajan had indicated to a few people that he wouldn’t “run away “ and that there was plenty of unfinished work, especially the clean-up of banks. And there was no give-away sign of his imminent exit considering that early this month he and a senior official of another regulatory body had discussed in detail some long-term plans for the Indian financial markets.
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A decision on his future would have had to be taken anyway by July as the lien on his job as professor at the Booth School of Business would have come to an end by September. It would have meant the government taking a decision much earlier on a potential second term and communicating that well in advance — which has not been a practice in India.
Rajan will be the first Governor in the last two decades or more who hasn’t been five years in the job unlike his three predecessors — D Subbarao, Y V Reddy and Bimal Jalan.
Before Swamy launched his series of attacks, it did appear that relations between the Finance Ministry and the RBI, strained last year by sharp disagreements between senior officials of the ministry and the central bank, were on the mend.
In 2015, the conflict was on the approach to be adopted towards implementing recommendations of the Financial Sector Legislative Reforms Commission or FSLRC with Rajan saying “if it ain’t broke, don’t fix it” and terming some of the suggestions as “faddish” and “impressionistic”. Ties soured in February-March of 2015 when in the budget, the government decided to transfer the function of public debt management from the RBI to another agency — by putting a clause in the Finance Bill and without prior discussion with the central bank — and a couple of other recommendations. After protests by Rajan and the RBI, some of these measures were rolled back.
What helped subsequently in maintaining ties, according to officials, was the departure of some officials in the ministry seen as hostile to him on many policy issues and the entry of a new set of officials with whom he had a much better rapport. For the record, the Governor often said that he and Jaitley never have had any serious disagreement.
The other recent difference was on the government decision to bring under the ambit of a new committee, headed by the Cabinet Secretary, the appointment of deputy governors of the RBI too apart from all other regulators. The protest against this move also did not move the government which took a decision based on an original recommendation of the FSLRC.
And despite unhappiness over his public remarks on subjects such as intolerance and interpretation of the PM’s Make in India mission, Rajan didn’t back off, leading to a debate within whether someone occupying an office such as the head of a central bank should speak on issues outside of his remit.
Support came from former boss P Chidambaram who was of the view that as a public intellectual, he had the right to do so. But former Finance Minister Yashwant Sinha, while acknowledging Rajan’s intellectual contribution, felt that he should have been more restrained. Indeed, one former top official had recently advised him privately to refrain from speaking on a host of issues.
Some of those who have worked in the ministry in the past said that the government should have engaged more closely with the RBI Governor on a range of issues. In his message to RBI staffers, Rajan said that he would be available to serve the country when needed. Few know that much before he came on board as Governor in September 2013 and well before he became the Chief Economic Advisor, the UPA government had reached out to him during the 2008 financial crisis.