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Rajan Departs, New RBI Governor to be Appointed Featured

India’s well-respected central bank governor, Raghuram Rajan, announced this weekend that he will be leaving his post at the Reserve Bank of India (RBI) in September to return to academia.  
Governor Rajan was appointed by the previous government to focus on reigning in rising inflation and stabilizing a declining rupee. The rupee has been more stable for the last three years and inflation is likely to remain within the current lower range, in part because of the RBI’s inflation-targeting policies but also due to falling oil prices as well as the government’s measures in supply side management.

Governor Rajan is a very well-respected central banker who, during his tenure, has institutionalized the RBI’s monetary policy process.  However, several other previous RBI governors have also been strong at the helm. For instance, during Governor YV Reddy’s term, the Sensex performed at an annualized 26.7%[5] , which is still the best performance since India opened up its economy in 1992. Governor Rajan’s predecessor was also an MIT alumnus and Dr. Manmohan Singh (who proceeded to become the Prime Minister of India) was a Cambridge alumnus.  The potential successor candidates currently discussed include a Princeton alumnus, a world bank chief economist, RBI deputy governors and CMD of India’s biggest public sector bank[6] . Thus, we believe that Governor Rajan’s successor will be up to the task.

Following Mr. Rajan’s announcement, despite investors and SEBI (Indian stock market regulator) exercising extra caution, the Sensex rallied 240 points on Monday, June 20, 2016 following foreign direct investment (FDI) reform announcements by the government and receding Brexit risk.  

In the 2016 FDI Report, it was noted that “India’s dramatic ascension in the global FDI rankings have largely been due to a dynamic Modi-led government focusing on ‘big bang’ FDI and labour law reforms. Relative stability within the government coupled with an effort to reduce the stagnating effects of bureaucracy has given foreign investors, across many industries, confidence in India as a remunerative investment opportunity.”

The Indian government has announced measures to relax FDI norms in multiple sectors, leading Prime Minister Modi to say that “India is now the most open economy in the world for FDI”.

India’s fundamentals are strong. There is political stability in the form of a majority government and the pro-business government is working hard to improve India’s attractiveness as an investment destination. In 2015, India became the largest recipient of FDI, surpassing China due to the efforts of the Modi government.

The new RBI governor is expected to further reduce interest rates, which will spur more growth in India. We expect this will be balanced against continued inflation targeting since in India, inflation is a significant issue and the government’s credibility depends on how well it is able to manage CPI. Moreover, the Modi regime has shown a general tendency towards being fiscally prudent. By not passing on the benefits of oil price drop to the consumers, and by focusing on reducing the current account deficit year after year, this government has shown that it can be trusted to take further measures to enhance economic growth at a sustainable pace.

Even though strong leaders such as Prime Minister Modi and Governor Rajan have been important drivers of change, India is more than one person. The RBI has a strong talent pool which includes the likes of Urjit Patel who was previously with the IMF and Boston Consulting Group.  RBI's move to appoint the six member committee signals a shift toward institutional approach toward monetary policy making, a move which will form a part of Governor Rajan's legacy. We believe that India, given its strong demographic, fiscal and monetary fundamentals, will continue to be one of the fastest growing economies in the world.

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