Raghuram Rajan must get 2nd term as RBI chief: CLSA

07 May 2016


In what can be seen as a vote of confidence for Reserve Bank of India Governor Raghuram Rajan, brokerage firm and investment group CLSA has stated that Indian bond and currency markets will be under big risk if his term is not renewed.

Christopher Wood, managing director at CLSA, said that Rajan should be given a second term after his first expires in September this year. This will help in keeping the bond and rupee markets stable.

Dr Rajan is seen as a person who has tamed inflation substantially. He halted the crash of the rupee after he became the RBI governor and is a favourite of global investors.

In his weekly report titled Greed & Fear, which is widely read by investors worldwide, Wood said the rupee should remain relatively stable in an emerging market context given that the RBI under Rajan is consciously targeting real interest rates, in stark contrast to the negative rates being targeted by G7 central bankers.

''This is also why Greed & Fear continues to like the Indian fixed income story, which for now continues to remain more straightforward than the Indian equity story. This is also why foreigners will snap up all the bonds they can buy when the government allows them to buy more on the market,'' Wood said.

Foreign investors currently own $52 billion worth of Indian debt securities.

Wood said the biggest risk to both the bond market and the currency is if Dr Rajan's term in office is not renewed.

''This is a possibility given that the RBI governor was appointed by the previous Congress-led government,'' he said. But Wood also believes that Rajan, who is trusted by market participants, enjoys the support of Prime Minister Narendra Modi.

''He (Modi) must also recognise the constructive role played by RBI under Dr Rajan in both imposing a tighter non-performing loan (NPL) reporting system on banks, carrying out a stress tests on banks, and putting pressures on them to go after defaulting creditors,'' Wood wrote in CLSA's newsletter.

In his view, the RBI governor's policy is refreshing in the context of the monetary ''quackery'' going on in the G7 world, which has been criticised by Dr Rajan.

''This is why he will be a natural candidate to lead the IMF, or some other such institution, once those unconventional monetary policies have been fully discredited. But that is a story which has not fully yet played out, which is also why he should remain RBI governor in the interim,'' he noted.

While finance minister Arun Jaitley has not commented on Rajan's extension, there is speculation that Rajan may be elevated as finance minister.


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