The Indian government has to find someone soon to replace the head of the central bank
Shailesh Andrade/ReutersMinister of Finance Arun Jaitley (L) and outgoing Reserve Bank of India Governor Raghuram Rajan (R)Raghuram Rajan, the governor of the Indian central bank, announced last weekend that he will be stepping down in September at the end of his first term - an abrupt decision that took the Indian government by surprise.
The announcement also unsettled investors and the market, and the rupee tumbled following the news.
Now comes the speculation about who will be the next Reserve Bank of India (RBI) governor - and what the potential risks and implications of each are. The Times of India reports that the government has already narrowed the list of candidates down to four - a current deputy governor of the RBI, two former deputy governors, and the chair of the State Bank of India.
The current deputy governor, Urjit Patel, represents the smoothest transition and is the least risky choice, according to a new report from Capital Economics. In general, an appointee with experience at the RBI would provide the most continuity, and Patel's history would be regarded the most positively by the markets.
Arundhati Bhattacharya, on the other hand, is the chair of the State Bank of India - the only candidate currently working in the banking sector as well as the only female candidate. Her appointment would involve more uncertainty about how closely aligned the bank would be with Rajan's current monetary policy views, which could be risky for financial markets.
The biggest threat to India's markets, according to the Capital Economics report, is the autonomy of the RBI, as there have been concerns over the past 18 months that the government is attempting to rein in the RBI's independence. High-ranking officials have criticized Rajan for keeping interest rates too high and have called for rate cuts. If the new governor were to cut rates suddenly, or compromise the RBI's independence from the finance ministry, markets could react badly.
The fact that the list of candidates is made up of economists, as opposed to government officials, sends a reassuring message to the markets. The Economic Times wrote that "The government feels appointing an economist will send a strong signal to the international community and address concerns over the RBI's monetary policy independence."
The successor is expected to be announced in the next month, putting an end to the speculation and hopefully restoring the market.