Indian central bank Gov. Raghuram Rajan—widely credited by investors for keeping India’s economy on a stable path—said Saturday that he would step down when his term ends in September, a development likely to unsettle markets.
During his nearly three years in office, Mr. Rajan, a former chief economist for the International Monetary Fund, has shifted the bank’s focus to curbing chronic inflation and presided over a period of strengthening growth and rising foreign-exchange reserves.
Mr. Rajan’s announcement came days ahead of a vote on the U.K.’s European Union membership, an event that has already unsettled traders in India and abroad in recent weeks.
“This news of Mr. Rajan will make markets more anxious and volatile,” said Ritesh Jain, chief investment officer at Tata Asset Management Ltd.
The governor made his announcement in a message to Reserve Bank of India staff that was posted on the central bank’s website. He called on his colleagues to work to keep inflation low and to complete a cleanup of the large amount of bad debt weighing on India’s commercial banks.
Mr. Rajan, who is an Indian national, also indicated he had been open to continuing in his job. “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,” he said.
A tweet from Finance Minister Arun Jaitley’s verified Twitter account expressed appreciation for Mr. Rajan’s work, and said a “decision on his successor would be announced shortly.”
Markets will be watching closely. India, after changing the way it calculates gross domestic product, has become the world’s fastest-growing major economy, giving it a higher profile among emerging markets as expansion in China slows.
“Foreign investors will watch to see if there’s any government pressure or not” in determining central-bank policy after Mr. Rajan leaves, said Andrew Holland, Chief Executive at Ambit Investment Advisors Pvt Ltd, a Mumbai-based money management firm.
Mr. Rajan, a respected economist who taught at the University of Chicago, charted a more independent path for the central bank, in part through the force of his personality.
He noted that India’s new, rapid growth numbers were at times hard to square with other indicators that showed an economy still in recovery. And he used his bully pulpit to call for tolerance and open exchange of ideas at a time when Prime Minister Narendra Modi’s administration was facing criticism on those fronts from its opponents.
Some politicians in Mr. Modi’s Bharatiya Janata Party have assailed Mr. Rajan in recent months, largely complaining that Mr. Rajan should have moved more aggressively to cut interest rates. Subramanian Swamy, a BJP member of parliament, last month said Mr. Rajan’s policy decisions had led to “the collapse of industry and rise of unemployment.”
“The government had invited this development through a craftily planned campaign of insinuations, baseless allegations and puerile attacks,” said P. Chidambaram, a member of the opposition Congress party, who was finance minister when Mr. Rajan was appointed.
Some investors said they had been betting Mr. Rajan’s term would be extended. One investor said it is important for the Indian government to quickly choose a suitable candidate to ensure a smooth transition. The investors declined to be named because they said this is a sensitive political issue.
The Associated Chambers of Commerce and Industry of India, a business lobby group, said in a statement that Mr. Rajan’s leaving the RBI was “not a good sign for Indian economy.”
Mr. Rajan, 53 years old, was an unlikely choice when he took over the central bank. He had spent most of his career in the U.S., on the economics faculty of the University of Chicago, and then as the first non-Western chief economist at the IMF.
He largely ignored India as a research subject. He was most famous for his prescient 2005 warning of a dangerous, expanding financial bubble in the U.S.
After returning to India in 2012 to serve as chief economic adviser to Finance Ministry, Mr. Rajan was named head of the RBI in 2013 during a period of global financial turbulence that provoked a sharp depreciation of the Indian rupee against the dollar.
“At that time, the currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the “Fragile Five”,” Mr. Rajan wrote in his departure statement.
Mr. Rajan responded with a number of quick steps, including setting up a new facility encouraging commercial banks to ramp up deposits from overseas, a way to lure repatriated cash from an estimated 25 million overseas Indians.
His rate-rising campaign was more controversial. Shortly after a surprise January 2014 increase, and before the May 2014 election sweeping Mr. Modi to power, a top official in Mr. Modi’s party--then in the opposition--blasted Mr. Rajan, saying he was “only aggravating the problems...by increasing interest rates.”
Those rate increases also earned Mr. Rajan a reputation for independence. That, investors say, has benefited the RBI, historically seen as bending to pressure from the New Delhi government in the management of monetary policy.
Inflation, however, slowed from double-digit peak to less than 6% now. “Today, we are the fastest-growing large economy in the world, having long exited the ranks of the Fragile Five,” Mr. Rajan wrote.
Mr. Rajan, a scholar of banking, said he would be watching the developments from afar. “I am an academic and I have always made it clear that my ultimate home is in the realm of ideas,” Mr. Rajan said.
By: Gabriele Parussini (WSJ).
Photo: Yahoo.
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