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“Baffled” by Raghuram Rajan’s exit – Kotak Institutional Equities

raghuram-rajan

Adding its voice to the chorus of disappointment around the decision for the Reserve Bank of India to seek a new governor, Kotak Institutional Equities said it was “baffled” by the decision.

RBI governor Raghuram Rajan — one of the most effective economic reformers India has ever seen — had announced his decision to step down from the position of India’s central bank governor “in consultation with the government.”

“While I was open to seeing these developments through, 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 September 4, 2016,” he said in a letter to RBI staff over the weekend.

Rajan has been applauded, as well as criticized, for his strong policies on reforming India’s banking sector, while even his critics have acknowledged his leadership in managing the tough times India faced with rising domestic inflation on the one hand and wild currency fluctuations in the international markets on the other.

However, a part of the industry — particularly real estate players — as well as the sections of the government felt that Rajan was too ‘tough’ in managing inflation. Despite repeated calls for easing of money supplies, Rajan refused to cut interest rates even when domestic growth sputtered.

On the other hand, Rajan managed to tame rampant, double-digit inflation by chocking excess money supply to the market.

Among his most controversial decisions was to force government-owned banks to transparently segregate and declare bad loans — something that truly exposed the precarious nature of the finances of many of India’s top banks. These actions also ruffled many feathers among India’s rich and powerful, earning the governor many enemies.

Kotak Institutional Equities — part of Kotak Mahindra Group, one of India’s largest financial services groups — said:

“In a surprising turn of events, Dr Rajan informed the RBI staff that he would not seek a second term as RBI governor and will return to academics. We are quite baffled by the development as continuity would have been preferable in the context of (1) the RBI’s organizational progression (formation of monetary policy committee among other things), (2) the Indian banking system’s large non-performing loan problem; the RBI was playing a central role in addressing the problem and (3) an uncertain and volatile global environment, especially with the Brexit referendum due on June 23.”

Kotak Institutional Equities, which helps big foreign financial entities to invest in India, said the move will unnerve foreign investors.

“The decision of the incumbent RBI governor not to seek a second term will likely unsettle investors sanguine about India. Most FPI investors view India as a preferred and stable market in an uncertain world … They will now have to grapple with India’s ‘Rexit’ and a possible ‘Brexit’ in the next few days.”

“The complementary policies of the government and the RBI have played a big role in India becoming one of the preferred markets for foreign investors,” it added.

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