PHILADELPHIA – The decision by the widely respected economist Raghuram Rajan not to seek a second term as Governor of the Reserve Bank of India (RBI, the central bank) is likely to roil India’s financial markets, which regarded him as a critical anchor for the country’s economy. Investors will now dissect the implications of his departure for the ability of the monetary authorities to ensure price stability and encourage growth, or rebuild a banking system beset with non-performing loans.
Ever since Alan Greenspan’s chairmanship of the US Federal Reserve Board, both markets and the media have tended to lionize and personalize institutions like central banks. But the “Greenspan effect” can impede dispassionate analysis.
There were genuine policy differences between the RBI and Prime Minister Narendra Modi’s government, and tensions flared when officials perceived public comments by Rajan as being outside his domain. But the ad hominem attacks on Rajan in recent months raise large questions with serious implications for India.
The most important question is this: Will Modi continue to maintain his strategic ambiguity about addressing his own party’s extremist elements, or will he demonstrate true leadership by curbing party members’ tirades about core state institutions and exercising greater care in selecting the heads of public institutions?