Raghuram Rajan's sudden exit from the post of Reserve Bank of India (RBI) Governor has put the national media and political circles in a tizzy - flooded with series of speculative stories, gossip and slander.
A wide range of theories are floating in the air currently. Most claim it was a tirade of sorts raised against Rajan by Subramanian Swamy and three incumbent union ministers that forced him to hang up his boots, possibly even against his wishes.
A certain section says that Rajan wanted to continue and see through the developments. At least this is what his last communication to the RBI staff suggests - “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. I will, of course, always be available to serve my country when needed.”
However, Rajan doesn't seem that feeble a soul to be bullied down by Swamy's pestering antics and “Go back” barb. He had incessantly articulated there is “more to do.” So what changed suddenly? What transpired between the ruling government and him in the last week or such? Some even claim Sangh desperately wanted to see his ouster even though Finance Minister Arun Jaitley wanted a second term for him. Well these all are theories – nothing concrete rests in front or back to bank upon.
Let bygones be bygones. Instead we should now discuss the implications of Rajan's sudden exit for India. So what exactly will Rajan's exit means for us?
Starting with Brexit, it is a major international issue both in political and financial terms for the global economy. The verdict whether Britain will stay or exit from the European Union (EU) will indisputably have an impact on the international currencies including that of India.
At a time when the markets are patchy, volatility rules the roost, and inflation is seen raising its head Rajan's abrupt departure can cause further disquietude. However, it will be wrong to say that markets just hinge on 'personalities'; though it's no secret that the Indian bourses aren't totally about fundamentals as well. Foreign fund managers conventionally say that about 5-10 percent of the rupee is Rajan. So it's discernible that rupee will be under pressure for some time. But, for how long, is still to be seen.
Coming to the second and the most important factor, currently, the redemption of the Foreign Currency Non-Residential (FCNR) bonds issued by Rajan way back in October 2013 to protect the rupee from its worst crisis in decades is causing major jitters to the currency market.
The currency market is due to face an outflow of $20 billion in the coming three months. This will put substantial pressure on the rupee – much more than what it's facing at present.
It will take immense work to keep the currency markets volatility-free especially in September-October when the redemption of FCNR bonds is due.
Rajan was assuredly a credible force, and rupee’s stability derived a lot of confidence from him.
Injecting liquidity into distressed public banks, implementing a goods-and-service (GST) tax and land acquisition still are some of the biggest issues that remain unresolved. With Rajan calling the day, uncertainty is bound to further increase in the markets.
And how rupee and markets will shape out for India in days ahead is not easy to predict since more than fundamentals, many known unknowns drive the sentiments. Brexit, US Fed and Donald Trump are definitely some of them.
Just wait a wee bit more to see if Rajan's sudden exit from RBI will have any wide-ranging consequences for Indian economy.
But then, didn't the man himself say, “Institutions are bigger than personalities.”