A checklist for India’s new central bank chief

June 20, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own. 

Raghuram Rajan’s decision to step down as governor of India’s central bank in September leaves open one of the most important jobs in the world’s fastest-growing large economy. His ideal successor would support key reforms, be an experienced macroeconomist, and have the resolve to stand up to the government.

The Reserve Bank of India is halfway through some big reforms that Rajan set in motion. It is leading the charge to force lenders to clean up their bad debts and recently awarded a plethora of new licenses in an effort to overhaul the sleepy state-dominated banking system. Meanwhile, the RBI is also due to inaugurate a monetary policy committee to set interest rates. To win the confidence of international investors, any candidate needs to be committed to completing these initiatives.

A solid foundation

The new RBI chief should also be a skilled macroeconomist, ideally with international experience. Though that might sound obvious, Indian Prime Minister Narendra Modi previously appointed Arun Jaitley, who has a background in law, as the country’s finance minister. That did little to help the government’s credibility on money matters. Economists have questioned the optimistic assumptions Jaitley used in the country’s latest annual budget, as well as recent changes to the way that the country calculates its gross domestic product.

Most crucially, the next RBI governor must not be a “yes man” when dealing with the government. A strong sense of independence will be vital to making sure the RBI’s monetary policy committee functions properly. Though the government will appoint three of the panel’s six members, the governor will have the casting vote. Rajan’s successor will need to reassure international investors that the central bank will not be coerced into jeopardising price stability by a government keen to speed up growth to fulfil its pledge to create jobs.

Rajan aside, the next best-qualified person may be Urjit Patel, an RBI deputy governor who has also worked at the International Monetary Fund. As Ambit Capital points out, Patel led the committee that recommended enshrining price stability as the central bank’s primary objective, as well as the creation of a monetary policy committee. Other high-profile names on the government’s list, according to Reuters, include Arundhati Bhattacharya, who chairs State Bank of India, the country’s largest lender. Though she commands enormous respect in the banking sector, she lacks experience of economic management.

The government’s failure to rein in nasty nationalist politics helped chase Rajan away. That makes it all the more important that India appoints an RBI governor who can reaffirm its international standing.

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