Rexit: Its impact on India

Raghuram Rajan’s sudden exit from the post of Reserve Bank of India (RBI) Governor has put the national media and political circles in a tizzy – flooded with a series of speculative stories, gossip, and slander.

Raghuram Rajan

Raghuram Rajan

A wide range of theories are currently floating in the air. Most claim it was a tirade of sorts raised against Rajan by Subramanian Swamy and three incumbent union ministers that forced him to hang up his boots, possibly even against his wishes.

A certain section says that Rajan wanted to continue and see through the developments. At least this is what his last communication to the RBI staff suggests – “While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016. I will, of course, always be available to serve my country when needed.”

However, Rajan doesn’t seem that feeble a soul to be bullied down by Swamy’s pestering antics and “Go back” barb. He had incessantly articulated there is “more to do.” So what changed suddenly? What transpired between him and the ruling government in the last week or so? Some even claim Sangh desperately wanted to see his ouster even though Finance Minister Arun Jaitley wanted a second term for him. Well, these all are theories – nothing concrete rests in the front or at the back to bank upon.

Let bygones be bygones. Instead, we shall now discuss the implications of Rajan’s sudden exit to India. So what exactly will Rajan’s exit mean for us?

Let’s start with Brexit. It is a major international issue both in political and financial terms for the global economy. The verdict of whether Britain will stay or exit from the European Union (EU) will indisputably have an impact on the international currencies including that of India.

At a time when the markets are patchy, volatility rules the roost, and inflation is seen raising its head, Rajan’s abrupt departure can cause further disquietude. However, it will be wrong to say that markets just hinge on ‘personalities’; though it’s no secret that the Indian bourses aren’t totally about fundamentals as well. Foreign fund managers conventionally say that about 5-10% of the Rupee is Rajan. So it is discernible that the Rupee will be under pressure for some time. But, for how long? It still remains to be seen.

Coming to the second and the most important factor currently, the redemption of the Foreign Currency Non-Residential (FCNR) bonds issued by Rajan way back in October 2013 to protect the Rupee from its worst crisis in decades is causing major jitters to the currency market.

The currency market is due to face an outflow of $20 billion in the coming three months. This will put substantial pressure on the Rupee – much more than what it’s facing at present.

It will take immense work to keep the currency markets volatility-free especially from September to October when the redemption of FCNR bonds is due.

Rajan was assuredly a credible force, and the Rupee’s stability derived a lot of confidence from him.

Injecting liquidity into distressed public banks, implementing a goods-and-service (GST) tax, and land acquisition are still some of the biggest unresolved issues. With Rajan calling the day, uncertainty is bound to further increase in the markets.

And how the Rupee and markets will shape up for India in the coming days is not easy to predict since more than fundamentals, many known unknowns drive the sentiments. Brexit, the US Fed, and Donald Trump are definitely some of them.

Just wait a wee bit more to see if Rajan’s sudden exit from RBI will have any wide-ranging consequences for the Indian economy.

But then, didn’t the man himself say, “Institutions are bigger than personalities.”

(This article was first published on the Zee News website.)

Ashish Pandey

I am a business journalist who is currently employed at Zee Business. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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