Central Banks

A post-election face-off for India’s central bank chief?

Punit Paranjpe | AFP | Getty Images

A confrontation may be on the cards between India's prominent central bank chief and the Bharatiya Janata Party (BJP) that is widely tipped to form the country's next government.

Media reports suggest Reserve Bank of India (RBI) Governor Raghuram Rajan, a former chief economist at the International Monetary Fund, may come under political pressure to pull back from a hawkish inflation stance from a government led by the BJP's Narendra Modi.

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Strategists in the BJP suggest they would prefer to have their own man at the head of the RBI, Reuters reported last month.

And if exit polls are anything to go by, Friday's results from the five-week long general election will deliver a majority for the BJP-led National Democratic Alliance.

"Last week we saw a statement from Rajan saying that setting monetary policy is his work and that he will do it independently," said one India-based economist, who declined to be named. "These debates always happen before an election. Still, let's not forget this is an RBI governor that comes with lots of experience, so whoever forms the next government will not just push for abrupt changes."


Rajan, who took the helm at the RBI last September amidst a currency crisis, has been widely credited with restoring stability to financial markets. Since September, the central bank has jacked up interest rates three times against a backdrop of a sluggish economy to shore up the battered rupee and contain inflation.

The rupee, trading around 59.90 to the dollar, has recovered about 13 percent of its value since hitting a record low last August. The prospect of a business friendly Modi taking power meanwhile has lifted Indian stocks to a record high this week.

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"I think that if they [the BJP] did try and lean on the Reserve Bank in any significant way, we can be pretty sure that Governor Rajan would resign," said Glenn Levine, a senior economist at Moody's Analytics in Sydney.

"It would have negative implications for the stability of financial markets in India and I would be surprised if they put pressure on Rajan to any notable degree."

Under the RBI Act, the central bank governor serves the government, which has the power to remove the governor and deputy governor.

In reality, this is unlikely to happen, say analysts. They add that BJP leader Modi, credited with turning the state of Gujarat where he is chief minister into an economic powerhouse, is known for recognizing good public servants.

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"Modi has the reputation of recognizing honest and capable public servants and tapping the right person for the right job," J Shivakaumar, a retired Indian Administrative Service officer, and Inder Sud, an economist, wrote in India's First Post this week.

"He will find in Rajan a person of great integrity, a keen intellect, and a recognized international stature," they added.

They also write that India has a tradition of not replacing RBI governors during a change of government and there have not been cases of RBI governors being "dismissed unceremoniously" because of policy disagreements.