Rexit: The Govt Will Pay For Looking A Gift Horse In The Mouth

20/06/2016 5:18 PM IST | Updated 15/07/2016 8:27 AM IST


Being a staunch Modi supporter, I have always believed that whatever decision is taken by his government is for the welfare of Indians. However, the "stepping down" of Raghuram Rajan as RBI governor does not fall into this category. The exit of Rajan -- who has been dubbed as the James Bond of Dalal Street -- has the potential to alter the course of India's financials, and not in a good way. Rajan's exit from India, facilitated in no small part by the government, is the perfect example of "brain drain."

India's loss

Let's start with Rajan's basic credentials. He has done engineering from IIT, management from IIM-Ahmedabad and holds a PhD from MIT, USA. His education alone speaks of his calibre. And while someone will of course replace Rajan as RBI governor, they will be unlikely to match his ability to critically analyze the Indian economy.

When Rajan had assumed the position of RBI chief in 2013, the Indian rupee was in a terrible position -- the US dollar had gained as much as ₹10 in a matter of months to ₹68 per dollar. During that time, emerging currencies such as the South African Rand and Argentina's Peso had tanked by as much as 10-20%; thanks to Rajan's quick decisions, the Indian rupee was saved to a great extent. In addition, India's inflation during this time was in double digits, hovering between 10-13%. Due to these factors, India GDP growth was faltering at 6%. Striking a perfect balance between inflation and stemming the Indian rupee was difficult, but Rajan pulled it off with ease, which ultimately led to India's growth.

The exit of Rajan has the potential to alter the course of India's financials, and not in a good way.

His policies have prompted the Indian rupee to trade between ₹64-68, while inflation numbers hover between 5-7% in a matter of just three years. What's more, thanks to him there are now enough reserves in India's kitty to keep depreciation of the Indian rupee at bay. Forex reserves have touched a record high of $363 billion under him. Let's not forget the time when China devalued its currency and India was saved because of Rajan. While certain politicians may be taking credit for making India the fastest growing economy in the world, this wouldn't have been possible without the Rajan-led RBI providing the backbone.

Rajan's exit has come at a time when banks are making record losses and are reeling under the threat of massive bad loans and NPAs. Seeing Rajan's past record it was crystal clear in corporate India that if anyone could save the banking system, it was him. I am certain his policies and his style of executing them would have anchored the loss-making banks.

Is politics at play?

No doubt there were differences between Rajan and some political heavyweights. For example, he did not heed Finance Minister Arun Jaitley's call to cut interest rates. After all, he was the man who had predicted the 2008 financial crisis. Who could understand the economy better than him? Then, of course, there was Subramanian Swamy's virulent campaign against Rajan, in which he called the RBI governor a Congress agent and accused him of killing small- and medium-scale scale industries. The fact is that it is because of Rajan that such enterprises are prospering in India. If he hadn't come in 2013, the Indian Rupee would have gone north of ₹70 and would have killed the industry. And an important question remains, given that Rajan has been in the RBI for three years, why did Swamy choose to speak out only now? This shows quite clearly that there is politics at play.

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