Indian, world business disappointed as Rajan calls it a day

India's popular Reserve Bank of India Governor Raghuram Rajan, feted by India Inc as well as foreign investors but under pressure from political opponents at home, stunned government officials, colleagues and the business community on Saturday by announcing he would step down after just one three-year term.

Rajan, a former chief economist at the International Monetary Fund, is held in high esteem by policymakers and investors at home and abroad for overhauling the way the Reserve Bank of India (RBI) operates. But he has faced mounting criticism from a faction within Prime Minister Narendra Modi's ruling party for keeping interest rates high and over a perception that he had begun to stray into politics.

In a letter to RBI staff, Rajan said he planned to return to academia, even as he noted two of his actions - the creation of a monetary policy committee to set interest rates and the clean-up of the heavily indebted banking sector - remained unfinished.

"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 Sept. 4, 2016," Rajan wrote.

"I will, of course, always be available to serve my country when needed."

While there had been speculation Rajan might not stay for a second term -dubbed "Rexit" in a nod to Britain's vote on European Union membership -government officials said they were surprised by the timing and manner of the announcement.

"Rajan put this in an open letter. It's his decision and we will do what best can be done," said one senior aide to Modi.

Rajan, much lauded by the Indian media, was appointed by the previous Congress government in September 2013. He won praise for his sure-footed handling of the country's worst currency crisis in more than two decades.

"The government appreciates the good work done by him and respects his decision. A decision on his successor would be announced shortly," Finance Minister Arun Jaitley said in a tweet on Saturday.

P Chidambaram, the finance minister in the previous government that appointed Rajan, said he was profoundly saddened by the decision.

"I am not surprised at all. The government had invited this development through a craftily planned campaign of insinuations, baseless allegation and puerile attacks on a distinguished academic and economist," he said in a tweet.

Subramanian Swamy happy
Rajan, who is on leave from the Chicago University Booth School of Business, had faced strident criticism from right-wing members of Modi's Bharatiya Janata Party, with parliament member Subramanian Swamy being the most intemperate in his remarks.

Swamy, a Hindu nationalist and former Harvard economist, tweeted his delight that Rajan "has said he will go back to US. Whatever fig leaf he wants for hiding the reality we should not grudge it. Say goodbye!"

Swamy had previously described Rajan as "mentally not fully Indian".

Another senior official said Rajan's criticism of rising intolerance in India was seen as direct interference in politics, complicating a decision on whether to re-appoint him.

"I wasn't aware of this and I don't think any of us were," a senior policymaker who works closely with Rajan told Reuters. "Looks like the government has taken a decision and he (Rajan) came to know about it and then sent this letter."

Many of Rajan's key accomplishments have come in close collaboration with the Modi government. He pushed for inflation targeting to tackle India's history of volatile prices, which was then made law by the government last year.

Rajan's departure is likely to roil markets on Monday, analysts said, at a time when global factors such as Britain's referendum on European Union membership are already weighing.

Replacement candidates
A senior government official told Reuters there were seven candidates on an initial long list to replace Rajan. These included RBI deputy governor Urjit Patel and Arundhati Bhattacharya, who is chairperson of State Bank of India, the country's largest bank.

The others are Vijay Kelkar, Rakesh Mohan, Ashok Lahiri, Subir Gokarn and Ashok Chawla, said the official, speaking on condition of anonymity due to the sensitivity of the matter.

They are mostly veterans of the RBI, the Indian civil service or the two major global financial bodies, the International Monetary Fund and the World Bank.

(See: Rajan exit shows India in poor light, say experts and There is more to RBI than governor: Rahguram Rajan )