Raghuram Rajan's exit will have deep impact on Indian economy

Raghuram Rajan has chosen the dignified way to exit as Governor of Reserve Bank of India, as his extension became the subject matter of fevered speculation. Government could have averted this step by taking Governor Rajan into confidence which it did not do. Rajan’s three year term ends on September 4, 2016.

The Governor has enormous credibility with international investors, and his leaving will have an impact on foreign inflows. Government ‘s knee jerk reaction stems from the fact that it has made Foreign Direct Investment in Defence and Civil Aviation 100% while Pharma it is 74%. If the past 2 years are an indication, will the inflow of Foreign investment higher than the foreign outflows will require enormous goodwill. With America in the Presidential election mood, and Brexit anxiety casts a spell in Europe, will there be an adequacy of foreign investment inflow; not to talk about Foreign Institutional Investment in our stock markets!

The reason why private investment is taking time is that there is over capacity on expectation of high growth. Everyone had borrowed and they were leveraged, hence Corporate Inc does not have the appetite to borrow more. The opportunities for income generation are increasing. But traditional jobs are depleting. We have to shift people’s expectations to this reality. Looking for jobs will not help.

Governor Rajan skillfully managed the country’s currency, inflation and foreign exchange reserves in a faltering world economic climate. His crack down on the ever greening of bank loans forced the banks to acknowledge bad loans rather than throw good money after bad. He maintained a tight balance between aspirations for growth and concerns about rising prices.

When Rajan leaves after tenure of good 3 years at the helm of the central bank, Indian economy is in a much better shape than it was when he received it. His successor has an enormous responsibility on his shoulders.