The Politician Who Forced Out India’s Central Bank Chief, And Life After ‘The Rajan Effect'
Emerging Markets: What Now For India?

I for one was disappointed that Raghuram Rajan decided not to seek a second term as the central banker for India. I believe that he has brought a lot of credibility to the monetary system and has been well respected for his views and policies. India’s FDI increased dramatically during his term and he will surely be missed. I have just one thing to add to this topic, before I move on to other more positive subjects.

There are always people who are not completely attuned to certain policies and have disagreements with how they may be implemented and in those cases their voices need to be heard. Indeed, that should be encouraged, but limited to policy. When a member of parliament resorts to name-calling, not only does he lower himself in stature with investors, he also does a great disservice to the institution he apparently represents.

The person in this case is Subramanian Swamy, who I am told is extremely peeved that he wasn’t named the Reserve Bank Chairman or for that matter the Finance Secretary, and because of that he carries out a campaign against both individuals. His accusations are pathetic and without merit, accusing Rajan of an “apparently deliberate attempt to wreck the Indian economy” and then added a personal invective stating that Rajan was “mentally not fully Indian.”

What the heck does that mean? And who put him in charge of deciding who’s Indian and who’s not? The problem with such pronouncements is that even coming from a man like this, it jars the markets which are already jittery. Prior to his remarks foreign investors purchased $22.8 million; however, after his outburst they sold Indian debt amounting to $1.1 billion. So who’s trying to destroy the Indian economy now? Should we ignore him or is there something bigger happening that doesn’t bode well for foreign investors?

Rajan’s achievements in three years have been remarkable and long-lasting. Three years ago I wrote an article and coined the term “the Rajan effect” for which I was soundly chastised by those who felt I knew nothing. But there is definitely a Rajan effect. With him at the controls, markets were calmed, the Rupee stabilized, and most importantly, India was heralded as the country to invest in.

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On the domestic front, he tackled the age old nemesis of institutional corruption, where politicians used the public sector banks as their own private funds to lend to their corporate cronies and then write off the debts. One look at the current account deficit, which in the latest quarter stands at 0.1% of GDP, should be enough to seal his legacy.

I remember being in India in 2014 when Narendra Modi was elected as Prime Minister in a landslide, and I knew then that with those two at the helm, there was no other way for India to go but up. Now, with one of the main architects of the economic resurgence leaving, the government has decided to spring into action as fast as possible to avoid any fallout from Rajan’s departure.

Modi in his own aggressive manner stepped in and announced a series of liberalizations aimed at the foreign investor. I have read them and I approve. But I am also waiting with bated breath to see who will step into Rajan’s rather outsized shoes. There are a number of qualified applicants, as Ken Rapoza of Forbes magazine lays out in his article titled, “Who Is On The Short List To Replace India’s Central Banker Rajan?” I do have my favorite, but that’s for another article.

One man I know won’t get the job is Swamy.

By the way, I would love to see his rationale for saying that Rajan is “not mentally Indian.” After all, Swamy himself was educated at Harvard! Tune in tomorrow when I will address the changes in the FDI rules and stocks that stand to benefit.

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