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Confusion over Rajan’s extension persists

Rajan, who was appointed by the previous UPA government for a three-year term that began on September 4, 2013, has been under attack from some quarters in BJP, including its Rajya Sabha MP Subramanian Swamy, for what they term as his failure to lower interest rates and boost economic growth.

A top Finance Ministry source, however, said no discussion has taken place in the government so far on whether to extend Rajan’s tenure or not. His fate would be decided closer to the date, he indicated.

A former chief economist of the International Monetary Fund (IMF), Rajan is currently on leave from the Chicago Booth School of Business, where he holds the post of Distinguished Service Professor of Finance.

If denied an extension, he will be the first RBI Governor since 1992 to not have a five-year term. His predecessors –D Subbarao (2008-2013), Y V Reddy (2003-2008), Bimal Jalan (1997-2003) and C Rangarajan (1992-1997) had five-year terms.

Rajan, who after taking over raised the short-term lending rate from 7.25 per cent to 8 per cent and retained the high rates throughout 2014, began the process of lowering the rates in January 2015. He has since then cut them 1.50 per cent to 6.50 per cent. Meanwhile, there were media reports on Wednesday that Rajan had indicated that he didn’t want to remain in the position after his tenure ends in September. 

In late 2014, Finance ministry officials were frustrated over his refusal to cut interest rates to stimulate growth, and moves were afoot to ease him out of the job.  At this point, Prime Minister convened a meeting of senior finance ministry staff that December to hear their complaints, at the end, Modi delivered a stern message – do not indulge in a public spat with the central bank.

The moment marked a turning point in ties between the heads of the newly installed government and the Reserve Bank of India (RBI). Since then, Modi and Rajan have developed a close working equation. With Modi’s patronage, it is more likely the government will reappoint Rajan, whose three-year term expires in September, should he wish to stay on, the sources said.

Rajan also found support in Union Finance Minister Arun Jaitley who had told the Prime Minister, that if the Governor was sacked it would send a wrong message around the world. Rajan has also been supported by several industrialists and think tanks around the world who believe that he is one of the finest economists. They have pointed out that Rajan had stuck to the path of reforms ensuring that India moved ahead on a growth trajectory.
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