NEW DELHI – Raghuram Rajan’s decision not to seek a second term as Governor of the Reserve Bank of India (RBI, India’s central bank) was met with shock from those of us who have been cheering on the Indian economy. While it is no secret that Prime Minister Narendra Modi’s government had its problems with Rajan, few believed that the government would take a step that so clearly undermines India’s interests.
The government never liked Rajan’s insistence on pursuing interest-rate cuts gradually in order to promote price stability; instead, it wanted to see them slashed aggressively, in order to spur growth. Nor was the government particularly enthusiastic about Rajan’s role as a public intellectual. And then, in the past few weeks, a toxic and ludicrous outburst of criticism from those close to the government erupted, focusing on Rajan’s performance and his supposed lack of “Indian-ness.”
Despite all of this, there were compelling reasons to believe that Modi’s government would keep Rajan on board.
First and foremost, losing Rajan controverts the Modi government’s commitment, unprecedented in recent history, to attracting foreign investment to India. Since taking office in 2014, Modi has spent more time than any of his predecessors selling the so-called Indian dream to foreign investors – efforts that have helped to spur a surge in capital inflows. The recent announcement that India will now, for the first time, allow 100% foreign ownership of firms in a broad swath of industries further reinforces the message that India is open for business.