Was it the politics or economics that cost Raghuram Rajan his job?

In a surprising move over the weekend, Reserve Bank of India (RBI) governor Raghuram Rajan decided to step down and return to academia when his term ends on September 4th. He is credited with changing regime in the central bank by making inflation targeting key cornerstone of the monetary policy as well as to deal with the problems of bad loans in banks. He is also credited with modernizing the RBI.

In an open letter to the stuff on Saturday, he said that he was open to see through the changes initiated such as banking reforms but “On due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as governor ends on Sept. 4, 2016.”

The fact that he was open for his second term, which has been given to every RBI governor since 1992 reflects that the government wasn’t ready to hand him his. When someone who has been good on the job, competent and perceived well is let go there are bound to be reasons, which are not be rational or rather reformist.

What was it that led to this point?

Rajan’s surprise decision could be attributed to his undermining by the government. When party hard liner Subramanian Swamy attacked Mr. Rajan’s policymaking and moreover his dedication on his job due lack of Indian-ness, there has been no defense from the government, which was considered as clear lack of respect by Mr. Rajan.  One can evaluate his efficiency or criticize it but when the question is on loyalty, government should have come to defend Mr. Rajan.

In addition to that, instead of handing out outright extension, which was the case for all previous governors in past quarter century, government has set up a panel that was considering several candidates, which means that Rajan was forced to reapply for his own job and to appear before the panel and that could have been the final blow.

Was it politics then or part of economics?

A mix of both. Bad politics and economics.

On the economics side, RBI’s inflation targeting could have meant that with inflation hovering at 5.76 percent, RBI would have gotten slow on the easing part. He declined interest rates to boost growth and instead stressed on reforms, within fiscal policy space. In addition to that, in his bid to clean up the banks and improve the macro-economy, he may have jittered some powerful business-political lobbies.

On the political side, he jittered the party hardliners, when he called for tolerance within the government to the minorities and views of others. Another major fault that was seen by party hard-liners is that Rajan’s non-conformity to triumphalist view of India painted by Prime Minister Modi. In an interview during World Bank and IMF meeting he said when as ked about India as a bright spot in the world that in the land of the blind, one-eyed man is the king. Insiders suggest he is seen as an image-rival in the international stage to Prime Minister Narendra Modi as Rajan is very prominent figure to global investors.

When a credible and competent central banker who understood both economy as well as the markets and strong enough to stand up to government lobbies unduly benefiting the corporates leave, global investors are bound to take pause and reconsider their views towards India’s reforms, which from the fiscal side so far has been more promise than actions.

Markets have so far shrugged off his departure. Nifty is marginally higher but missed out on the global rallies, while Indian Rupee is weaker by a little more than half a percent. Currently trading at 67.41 per dollar.