Tuesday September 25, 2018
Home Business Fear Of Econo...

Fear Of Economic Volatility Raises as RBI Governor Decides To Resign

There has been widespread speculation that Rajan quit because of what some termed as “discouraging signals” from the government.

1
//
235
Image Source: Financial Express
Republish
Reprint
  • India is now the world’s fastest-growing major economy
  • Raghuram Rajan helped stabilize India’s currency when the rupee was plunging and inflation was raging
  • Praising Rajan’s contribution, Finance Minister Arun Jaitley expressed confidence his successor will be a “good person”

The Indian Central Bank governor’s decision not to seek a second term in office has raised concerns the country could face a loss in investor confidence and economic volatility. The widely-respected economist, Raghuram Rajan, is credited with making an important contribution to India’s economic turnaround after a choppy phase.In a signal of uncertainty looming ahead of his departure in September, the rupee fell to a one-month low Monday.

Rajan’s departure: not a big surprise

Rajan’s weekend announcement to quit came after weeks of speculation on whether the government will renew his tenure as head of the Reserve Bank of India (RBI). In a letter to his staff, Rajan said he had been open to staying on to see through the reforms he had begun, but that “on due reflection and after consultation with the government,” he was returning to his “ultimate home in the realm of ideas.”

Widely feted as one of the world’s best Central Bank governors, the former International Monetary Bank economist helped stabilize India’s currency when the rupee was plunging and inflation was raging. As growth momentum returned, the country regained credibility among international investors, who had turned their back on emerging economies.

India’s economy is soaring

While countries like Brazil and Russia continue to face hard times, India is now the world’s fastest-growing major economy.

Finance Minister Arun Jaitley sought to calm investors Monday telling a television network “the country’s economy is driven by strong fundamental factors.” Praising Rajan’s contribution, he expressed confidence his successor will be a “good person.”

Finance Minister Arun Jaitley speaks to RBI Governor Raghuram Rajan during a convocation ceremony for students at a university in Mumbai on January 9, 2015 Image Source: NDTV Profit

Follow NewsGram on Twitter: @NewsGram1

Symbol of stability

The head of emerging market economics at JP Morgan, Jahangir Aziz, stressed that Rajan was a symbol of stability for many investors. “They have invested on the fact that India has managed to put together a reasonably strong story of macro-economic stability. Many of them associate that in part to the Reserve Bank of India, Raghuram Rajan.”

Aziz said investors will watch to see whom the government appoints as Rajan’s successor and would like to see continuity in policies. “The need of the hour is to calm down market nerves,” he says.

There has been widespread speculation that Rajan quit because of what some termed as “discouraging signals” from the government.

Follow NewsGram on Facebook: NewsGram

There was criticism of Rajan

Rajan was not without his critics, who said his refusal to slash interest rates, and a clean-up of bad loans he was pushing at state-owned banks, were choking private investment. The most vocal attack came from a member of the ruling Bharatiya Janata Party, Subramaniam Swamy, who raised eyebrows with his comment that Rajan was “mentally not fully Indian” and complained that he had not acted to ease the heavy debt burden of many Indian companies.

Although India’s economy is growing at over 7 percent and has overtaken China as the world’s fastest growing economy, Rajan has repeatedly cautioned that India’s economic recovery still rests on fragile foundations.

Economist Rajiv Kumar at New Delhi’s Center for Policy Research said fears about the impact of Rajan’s exit could be overblown and pointed out that stock markets did not tank Monday as many had feared. “It’s institutions that matter, and the RBI has known to be a very competent institution with huge inherent strengths,” says Kumar.

Meanwhile, the government ushered in more economic reforms Monday, announcing sweeping changes to rules on foreign direct investment by opening up its defense and civil aviation sectors to complete outside ownership, and loosening some restrictions on the pharmaceutical and retail sectors.(Source :VOA)

ALSO READ: 

Click here for reuse options!
Copyright 2016 NewsGram

  • Vrushali Mahajan

    This is really sad to know. Rajan has helped the Indian economy soar high. He is a man with ambition and great personality. Also, IMF says India would outspace China’s slowing economy. So, this should be looked after.

Next Story

Fall Of The Currency And Increase In Oil Prices: India ‘s Turmoil

The falling rupee has given a boost to some of India’s most lucrative exports, such as software services and pharmaceuticals, which add up to billions of dollars.

0
India
Rajesh Kumar, left, shares a ride to work with another employee, Dilip Swain, right, as higher petrol prices in India begin to be felt in people's pocketbooks.VOA

The fall of the currency of India to record lows and rising global oil prices have raised worries that the world’s fastest growing economy faces headwinds that could hurt the fortunes of Prime Minister Narendra Modi’s party in next year’s general elections.

From people filling fuel at gas stations to thousands of students heading out to study overseas, the impact of the slumping rupee is sparking discontent.

Having plunged by about 12 percent against the dollar this year, the rupee is one of Asia’s worst faring currencies, and as in other countries, the slide has accelerated since the crash of the Turkish lira.

“The reasons are global. We must bear in mind that in last few months, dollar has strengthened against almost every currency,” said Finance Minister Arun Jaitley recently as he tried to send out reassuring signals that India’s economy is on track.

India
The rupee has plunged by about 12 percent this year raising fears of spiraling inflation. VOA

The rupee’s sharp depreciation comes at a time when the economy had recovered from a slowdown and surged to a two-year high in the quarter that ended in June. Forecasts put growth for this year at 7.5 percent.

Economy will slow

But economists warn this momentum will be difficult to sustain as the tumbling rupee, along with rising crude oil prices, takes a toll on growth. India, the world’s third largest oil importer, gets almost 80 percent of its fuel needs overseas.

“The government needs to mellow down on growth aspirations,” said N.R. Bhanumurthy, economist with the National Institute of Public Finance and Policy. “The growth needs to come down to a little less than 7 percent.”

Even as the government faces the prospect of a slowing economy, it is under pressure to lower taxes on gas and diesel to bring down the sharp rise in prices. Fuel is one of the most heavily taxed items in India, with rates as high as nearly 50 percent. Prices vary from state to state, but they have gone up by about 14 percent this year.

Hoping to cash in on the growing disaffection over the surge in fuel prices and the sliding rupee, opposition parties led nationwide protests that shutdown offices and schools in several cities this week.

India
Discontent with spiraling fuel prices poses a challenge to Prime Minister Modi’s Bharatiya Janata Party ahead of general elections next year. VOA

The government dismissed the protests, saying that although people faced momentary difficulties, they understood they were because of factors beyond its control.

Political analysts are not so sure, pointing out that fuel prices are a politically sensitive issue in India and usually result in a spike in inflation.

“Anger is rising, there is resentment,” said Satish Misra at the Observer Research Foundation, warning the ruling party will face a backlash “Obviously that is going to have a negative impact on the electoral fortunes of the Bharatiya Janata Party, there is no doubt about that.”

Warnings from economists

Among those who are upset with the high fuel prices is Rajesh Kumar, who commutes 30 kilometers to the advertising agency where he works. Hit by the higher prices that eat into his income, he has started sharing the ride with another employee.

India
Narendra Modi. Wikimedia Commons

“I have given up the idea of buying another car,” he said despondently. “I will not be able to afford the cost of running it.”

Economists however have warned the government against giving in to populist pressures ahead of a series of state polls later this year and general elections around April next year. They say lowering taxes on fuel or taking measures to prop up the currency will strain the country’s finances and hurt the economy in the long run.

Also Read: Diverse Gathering To Be Addressed This World BioFuel Day: PM Narendra Modi

“One needs to be more careful and vigilant,” Bhanumurthy said. “It is easy for India to stay with low growth than experiencing the high deficit.”

But there is also some good news for the Indian economy. The falling rupee has given a boost to some of India’s most lucrative exports, such as software services and pharmaceuticals, which add up to billions of dollars. (VOA)