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Storm clouds gather over Rajan at Reserve Bank of India policy meeting

Raghuram Rajan, The Reserve Bank of India (RBI) Governor.
Danish Siddiqui | Reuters
Raghuram Rajan, The Reserve Bank of India (RBI) Governor.

Reserve Bank of India Governor Raghuram Rajan has two clouds hanging over him: the all-important monsoon effects, plus the political storms over whether he keeps his job.

In fact, the RBI's policy decision wasn't the main show this time around; the RBI will kept its benchmark repo rate at 6.50 percent, as expected.

Instead, economists expected the RBI's main focus to be on ensuring the broader economy felt the benefit of more than 150 basis points that have already been sliced from the main interest rate since the start of 2015.

The central bank will also be watching for meteorological storm clouds: the closely watched monsoon season and its impact on inflation. India depends primarily on rainfall for agricultural irrigation, and the quality of the monsoon season will have a large impact on inflation across the country. Too much or too little rain can lead to a poor harvest season, driving up food prices. The agriculture sector, which contributed around 18 percent of gross domestic product (GDP) in 2014, according to World Bank data, employs millions and spurts in food prices in the past have led to the ouster of governments.

In a note Monday, DBS noted that food inflation climbed in April and likely remained high in May due to warmer than usual weather.

DBS said in a note last week that the Indian Meteorological Department expected an above-normal monsoon in the June-to-September period, when the country gets most of its annual rainfall. The bank added that the rainfall was expected to be well-distributed around the country, particularly over the July-to-August planting-and-sowing peak period.

That could bring down inflation and allow the central bank to ease policy further later in the year. Overall, economists pointed to signs that industrial activity hit a bottom. First-quarter GDP growth came in at a better-than-expected 7.9 percent on-year, although economists noted there was underlying weakness in some segments.

But even with the improved economic picture, political storm clouds over Rajan's tenure may not end with a dance number.

The central banker, whose term is up for renewal in September, has come under unprecedented political fire.

If Rajan's tenure isn't continued, he will have the shortest stint of any Indian central bank governor since 1992, even though he is among the most highly regarded central bankers globally, with his resume including time as the chief economist at the International Monetary Fund.

The attacks against Rajan come primarily from a few politicians and appear somewhat specious. Indeed, a poll of the subcontinent's chief executive officers by India's largest-selling financial newspaper, The Economic Times, found that chief executives at some of India's largest companies overwhelmingly support Rajan. But that hasn't stopped a flow of invective.

Subramanian Swamy , an influential member of parliament from the ruling Bharatiya Janata Party (BJP), has publicly asked Prime Minister Narendra Modi to immediately fire Rajan, accusing the central bank governor of being "mentally not fully Indian" after having worked overseas.

Additionally, Swamy claims Rajan's introduction of an inflation target for the central bank's policymaking is "wrecking" the Indian economy as it has resulted in the RBI not lowering interest rates to boost growth. Swami said in an open letter to Modi that "[Rajan] believes in raising interest rates to decrease inflation. This approach is like murdering someone suffering from fever, so that his body temperature drops."

Raising and lowering interest rates in response to inflation is standard practice at most major central banks. Because preserving the appearance of a central bank's independence from political influence is considered key to its credibility and effectiveness, it is unusual globally for such an institution to come under political attack.

Another point of tension has been Rajan's efforts to force banks to clean up the bad debts on their balance sheets, which have also sparked discontent among businesses now being pushed to repay their loans.

But even with the political noise calling for more interest rate cuts, some analysts said cutting interest rates may not do much to support the economy.

"Incremental rate cuts may not have the desired effect as public sector banks (which constitute 70 percent of the banking system) may remain reluctant to cut lending rates or approve new loans in the backdrop of stressed balance sheets and weak corporate sector performance," Taimur Baig, chief economist at Deutsche Bank, said in a note last week.

At the same time the central bank chief has come under fire, the defense of Rajan from the upper echelons of government has been underwhelming.

When asked about the subject in an interview with the Wall Street Journal , Modi said only, "I don't think this administrative subject can be an issue of interest to the media," adding that it wouldn't be considered until September.

In late May, Finance Minister Arun Jaitley stepped in with a lukewarm defense, criticizing "comments on personalities," but declining to say whether Rajan's term would be extended, Indian paper "The Economic Times" reported.

Last week, Jaitley told CNBC it was "fair enough" to say that Rajan was well-respected and had a solid track record, and that the government would keep that in mind when making a decision.

Others have also been less than effusive in their defense of Rajan.

Minister of State for Finance Jayant Sinha said only that government was committed to the central bank's independence and "strengthening and protecting institutions," according to Indian media reports.

Market players, however, have defended the central banker.

Indian newspaper The Economic Times reported that Mohamed El-Erian, Allianz's influential chief economic advisor, said via email that "[Rajan] is rightly deemed as one of the very best central bank governors in the world," adding, "Indeed, few can match his expertise, experience and knowledge."

Other analysts have echoed that view.

"Everybody pretty much would agree that India is better with Rajan than without," Devika Mehndiratta, a senior economist at ANZ told CNBC's "SquawkBox" on Tuesday.

But she's relatively sanguine on whether Rajan's term is extended.

"This sort of a doomsday scenario that's being painted if he were not to get his extension is a bit overdone," she said, noting that Rajan has institutionalized many of his reforms, such as the RBI's new inflation-targeting framework.

"People are worried that the new person that will come in will be very ad hoc, but the fact is, it's in law," she said. "I don't think the new governor, whoever it is assuming Rajan doesn't get a second term, can deviate too much from that framework."

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1