Why there's no need to be emotional about Rexit

The announcement by Raghuram Rajan to exit the post of governor of RBI and return to academics may not have come as a surprise as this talk had, over the last month or so, snowballed into a controversy to the extent that the governor had prepared a reply for the media on this subject for the interaction which followed the credit policy on June 7.

There have been several emotional reactions to this announcement from CEOs, bankers, economists and market practitioners. The general consensus was that Rajan should have been given an extension as his work has been remarkable to the extent that it cannot be replicated.

While the first part is true and cannot be debated, the latter is hard to digest and it appears that judgment has been clouded by emotion. On this issue even Rajan has been very modest.

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The RBI under Rajan has done a remarkable job in formulating cogent policies in the areas of monetary policy, financial markets and banking regulation. The rot that has set in the banking sector through the build-up of NPAs has been scooped out by the RBI, and one can feel confident that the system will emerge stronger and cleaner this year.

What has been specifically different is that Rajan started his tenure with an agenda and in strict textbook-like fashion, has addressed them together and implemented almost all the action points. The focus on results has been distinct and different from the approach taken hitherto by the RBI.

Ideas relating to, say, new banks or deepening the government securities (GSec) derivative market or globalising the rupee were work in progress that found definite structures under his tenure.

It may be recollected that when Rajan had taken over, there was widespread expectation that he would lower interest rates that were increased by D Subba Rao.

However, in keeping with the objective of inflation targeting, interest rates were increased. This is indicative of the stance of the central bank and not an individual.

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How different will be things now? Rajan has said earlier that the institution matters more than the personality, which is the answer here.

The RBI has been a very strong central bank that has taken the economy through various crises situations with minimal distortions. Bimal Jalan, YV Reddy and Subba Rao have all had their challenges that were countered astutely.

The calibrated approach to regulation and supervision has ensured that there has been no systemic failure since reforms were introduced. The only hiccups witnessed in the early years were more in the stock markets that had their reverberations on the banking system.

Two areas often come up for discussion. The first is the impact on investment. A few foreign investors have pledged their support for Rajan and indicated that they may not be pleased otherwise.

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As he is an accomplished academician and economist, it clearly inspires confidence. However, it must be remembered that investment goes where there are opportunities and not because of a personality.

In fact last year, the FPI flows were negative and hence one cannot relate the two to conjecture the future flow of foreign funds.

The other relates to currency markets. While the swap facility on Fixed Deposit (FCNR) account deposits introduced in 2013 to tide over the crisis caused by the Fed's tapering announcement was novel, the RBI had been actively talking of issuing a sovereign bond.

Hence, it would be incorrect to conclude that the external account of the country would have been ruined in his absence as these two schemes are almost analogous.

While the currency market did reveal some decline on June 20, one must remember that rupee has been moving down the entire week with the Brexit fears adding an extraneous dimension.

Hence, if we are willing to accept that professionals of high calibre with the right credentials have occupied this position in the past, there is no reason to believe that the replacement will not be on par.

The show will go on as before and there is no need for any concern. This has also been reflected in the first day show in the markets. The Sensex was up by around 240 points and the Nifty by nearly 70.

As this issue has been grabbing headlines, even more than the IPL or UEFA, thus making an otherwise dignified decision more plebeian, the broader question to be asked is whether or not the governor should have tenure for five years.

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Earlier appointments were for five years, which provided time for driving an agenda. Subba Rao was the first in recent central bank history to have a term of three years, which was extended by two.

Hence, expecting an extension of two years was logical for Rajan. Hopefully the government would steer clear of ambiguity when the next appointment takes place.

The conjecture now is whether it would be someone from the ministry or a celebrity economist.

(Courtesy of Mail Today.)