Yesterday, June 18, 2016, Raghuram Rajan in an email address to his staff in RBI communicated that he is not going to seek an extension to his term as a RBI governor, which is ending on September 4, 2016 and will be going back to academia. The timing of his decision is debatable considering the upcoming Brexit voting but his decision may not be debatable considering recent mud-slinging on him.
Three years ago when then Prime Minister Manmohan Singh appointed Raghuram Rajan as RBI governor, I wrote about Rajan's challenges of dealing with Impossible Trinity. When he was appointed in 2013, India was facing problems of decade low growth rate, tumbling domestic currency and double digit consumer inflation.
A quick glance at Rajan's term shows us that he quite successfully dealt with all major problems through monetary policy framework. Immediately after taking the charge he helped the domestic banks to tap large chunk of legitimate foreign funds as deposits in India, which minimized the pressure on Rupee and reduced the volatility on a greater extent.
Under his leadership, RBI changed the inflation watch from old fashioned WPI index to more relevant CPI index and built consensus along with the government of getting a mandate of CPI inflation target 5% by March 2017. During three years of his tenure as RBI governor, he quite successfully brought down CPI inflation from about 11% to 5.7% and now on track to achieve the target. After being inflation warrior during his initial tenure, he adopted to monetary accommodative stance in latter part as he achieved the inflation controlling task.
In addition to monetary policy regulation, he managed to intervene before non performing assets of banking sector spread further and burst. Also, Rajan brought in more competition in banking sector by giving new licenses.
Now the big question for Narendra Modi and his government is who is going to fill the big void created due to Rajan's exit (Rexit). How the government will manage to change the perception of manner in which Rexit happened?