Govt officials critique Raghuram Rajan amid moves to limit RBI exit fallout
Modi government moves to show reform plans still on track by easing FDI rules a day after Raghuram Rajan reveals plan to depart RBI
New Delhi: The Modi administration critiqued outgoing Reserve Bank of India (RBI) governor Raghuram Rajan’s record and moved to reassure foreign investors two days after he unexpectedly withdrew from being considered for a second term.
While high interest rates appealed to foreigners, they hurt domestic Indian industry, a senior government official told reporters in New Delhi, asking not to be named citing rules for speaking with the media. The government also suggested that the RBIs own capital could be used to bolster state-owned banks as they grapple with non-performing loans, according to a document obtained by Bloomberg on Monday.
Prime Minister Narendra Modi’s government moved to show that its reform plans were still on track, allowing 100% foreign investment in sectors from local airlines to cable-television providers. The rupee, Asia’s worst performing currency this year, slipped to a one-month low on Monday before paring its declines on suspected intervention by the central bank.
The government also pledged to quickly fill the leadership vacuum at the RBI. Five candidates are in the running to succeed Rajan, according to another official. They are two finance ministry officials—economic affairs secretary Shaktikanta Das and chief economic adviser Arvind Subramanian—as well as a trio of current or former deputy RBI governors: Urjit Patel, Rakesh Mohan and Subir Gokarn.
The moves amount to a concerted effort to limit the fallout from Rajan’s departure. In a letter to staff on Saturday, Rajan said he was open to continuing in the role, indicating that a political fallout with Modi’s government prompted his decision.
The government’s critiques on Monday address two of Rajan’s biggest priorities: monetary policy and the bank clean-up. Rajan on Saturday said he had more work to do in both of those areas.
Rajan raised rates after being appointed by the previous government in 2013, and then as inflation eased he cut them slower than some in Modi’s ruling party had urged. On Saturday he lauded a new inflation-fighting framework implemented during his tenure, which “helped halve inflation and allowed savers to earn positive real interest rates on deposits after a long time.”
Bad bank
The document obtained by Bloomberg, which had no date, said that the RBI’s capital could either be directly injected into public-sector banks or used to create a “bad bank” to resolve soured debt. Rajan had given banks until March 2017 to clean up their books with provisions for non-performing loans, and opposed the creation of a bad bank because most of the problems were with public-sector companies.
Alpana Killawala, a spokeswoman for the RBI, didn’t immediately reply to an e-mail seeking comment. Finance ministry spokesman D.S. Malik declined to comment. Bloomberg
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