Even Raghuram Rajan may have trouble filling his own shoes. Investors are fretting about the future of the Reserve Bank of India chief, whose term expires in September. The next test for Rajan – or whoever replaces him – will be to bed down reforms and keep India on track.
The former IMF chief economist’s accomplishments will be hard to match. Since taking charge in 2013, Rajan has stabilised the currency, almost halved double-digit inflation, and helped attract record levels of inward investment. He has also forced state-controlled banks to break cosy ties with tycoons and start acknowledging non-performing loans. Little wonder that international investors view his continued presence as crucial to India’s economic success.
Admirably, Rajan has worked hard to make himself replaceable. Price stability has been enshrined as the central bank’s primary objective. A six-member monetary policy committee, half of whom are to be nominated by the government, is set to take over responsibility for setting interest rates. That means fighting inflation will depend less on the determination of a single person, though the governor retains a casting vote.
Even so, there are several reasons why the job looks set to get harder. The world’s rosy view of India owes much to cheap oil. However, a barrel of Brent crude already costs 20 percent more than at the start of the year. If prices continue to rise, the oil importing nation’s current account deficit may again become a concern. Higher U.S. interest rates could put new pressure on the rupee and encourage fund outflows.
The new monetary policy committee will also take time to bed down. Any governor, new or old, may struggle to form a consensus among policymakers. Public divisions could prove unsettling. And while banks are closer to acknowledging their bad loans, working them out will be hard. A broader plan to revitalise state-owned lenders hinges the government authorising capital injections and overhauling boards stuffed with politically connected figures.
Prime Minister Narendra Modi could extend Rajan’s tenure until 2018. But whoever occupies the RBI governor’s seat come September will struggle to match the achievements of the past three years.