Urjit Patel

The resignation of Urjit Patel is not surprising though the timing certainly is unexpected. It has robbed the London court ruling on Mallya extradition of its due share of discussion and limelight. Our exhilaration over India's victory in the Adelaide cricket test has been subdued thanks to this untimely development.

Urjit Patel has politely attributed his resignation to personal reasons. But the former Governor, Raghuram Rajan, has not been polite enough. In an interview to CNBC, he has characterised the departure as 'a statement of dissent'. When reminded that Urjit Patel has quoted personal reasons, Rajan remarked, 'You have to read between the lines'. Apparently the mental scar that Rajan suffered over the way he was treated by the government has not yet healed. However, one expected a little more finesse from Raghuram Rajan.

Narendra Modi's reaction is intriguing.  " He steered the banking system from chaos to order and ensured discipline. Under his leadership, the RBI brought financial stability."

Does the prime minister imply that Raghuram Rajan left the banking system in chaos? Was the financial system unstable under Rajan? Is Narendra Modi praising Patel or blaming Rajan?

Viral Acharya's fulmination

Delivering the A.D.Shroff Memorial Lecture in Mumbai recently, Viral Acharya, a Deputy Governor of RBI spoke at length about the importance of independent regulatory institutions. He emphasised that the risks of undermining the independence of a central bank are potentially catastrophic.

He classified economies as either value-enhancing or rent-extracting. Reduced independence of the central bank would promote rent-extraction and thus corrode economic efficiency.

Methods adopted to rob the central bank of its independence include a)appointment of non-technical people in senior management, b)erosion of statutory powers of the central bank, c)preference for discretionary policies over rules-based policies and d)establishment of parallel regulatory agencies.

In order to ensure independence from the government, the central bank needs sufficient reserves of funds and definite rules for apportionment of profits including transfer of profits to government.

Governments that do not favour independent central bank attract market wrath and ignite economic fire whereas others enjoy cheaper funds and support of international investors.

All these are unexceptionable motherhood statements. Acharya  wants the government to desist from seeking higher share of profits (present and past) from RBI and interfering with central bank's guidelines on delinquent borrowers.

Is Acharya justified in expressing his angst in a public forum? Independence of RBI has to be reflected in the strength of RBI's Board of Directors to be unswayed by extraneous influences. Acharya as a member of RBI's Board ought to have taken the Board into confidence and it was for the Board to send a message to the government.

RBI's inflection point?

Any change in leadership of an organisation is bound to create some reorientation however mild it is. If the differences in the personalities are huge, the reorientation is likely to be stark. Are we witnessing such a development in RBI?

Raghuram Rajan and Urjit Patel may not be as different as chalk and cheese. Yet, they are not birds of the same feather. Those who were witness to the overt camaraderie between RR and UP during the monetary policy announcements are apt to suppose that Patel would follow the policy laid down by Rajan to prioritise certain measures to control inflation over uncertain steps to promote growth. Rajan was an inflation hawk and could Patel be drastically different?

On October 4th, Urjit Patel announced a 25 basis point reduction in the policy repo rate as if to prove that he has a mind of his own. He paid glowing tributes to external members of the Monetary Policy Committee (MPC) as being of 'outstanding pedigree'. Patel is as taciturn as Rajan was articulate. It is good that he is, for see what he said about the merits of MPC. "MPC members bring value and a diversion of opinion, which is what the MPC is about." Did he mean diversity of opinion? Further, if there was unanimity regarding repo rate cut, there could not have been any expression of healthy divergent thoughts.

Ashok Lavasa, the Finance Secretary, pronounced unadulterated nonsense when he welcomed the cut in repo rate as "a decision which will go down well with all sections of the economy." Does he really expect the savers to welcome reduction in deposit rates?

Rajan believed that the real policy rate (that is the difference between repo rate and CPI inflation rate ought to be between 1.5% and 2% Now the RBI has scaled it down to 1.25% to 1.5% This is sought to be justified in the background of negative interest rates being witnessed in some economies.

Central banks which have ushered in low / negative interest rate regime have no clue about what needs to be done hereafter to stimulate growth. They have been on a thoughtless slippery path. Raghuram Rajan repeatedly cautioned against such unconventional policies which would be very difficult to wind down. Urjit Patel perhaps is not convinced.

Reduced cost of borrowing will be inflationary through the aggregate demand side though its stimulatory impact on growth is uncertain. Demand for lower interest rates is addictive and we can expect more clamour for further reductions. In the meanwhile, senior citizens who depend on interest income will continue to be left in the lurch.

RBI Governor drops a bomb

While addressing the press immediately after announcing the updated monetary policy, Raghuram Rajan made a revelation that should have shocked the audience, but did not. He said that RBI had entered into forward hedge in connection with the FCNR deposits collected by the commercial banks under the liberal scheme formulated by him as soon as he took charge as Governor. It now emerges that some of the counterparties in these hedging contracts have expressed their apprehension about their ability to deliver dollars.

These counterparties account for about $20 billion. If these apprehensions materialise, RBI would be susceptible to unprecedented credit risk. Rajan has warned that RBI would not lend a helping hand to such counterparties. The resultant monetary loss, if any, may be marginal; but, the damage to sentiments would be substantial. Let us wait and watch. There could be some surprises here. Is the Governor only trying to forewarn in order to contain any damage that may occur? Is this a strategy to preempt allegations of inadequate due-diligence?

Added on June 8: Are the views expressed in this post an exaggerated interpretation of what was perhaps an innocuous reference made by the Governor? It would appear so especially since Subramanian Swamy has not reacted so far! As Alan Greenspan would say, "If you think you have understood what the central bank chief says, you have probably not heard correctly."

Surprise decision by RBI Governor

Raghuram Rajan has taken everyone by surprise, pleasant or unpleasant depending on the lobby concerned, by reducing the Repo rate by 50 basis points to 6.75% The government and the borrowers are happy. Savers of money who provide the raw material for capital formation are shocked.

Why did the Governor do the unexpected? It is of course possible that he was truly convinced that the risk of inflation is now less than the risk of absence of growth. It is also possible that political pressure has breached the tipping point.

Perhaps psychological factors were also at play. Some of us, at least sometimes, come under the grip of 'Surprise Bias'. The Governor may have yielded to the urge to create a surprise. Secondly, central bank chiefs do not like their actions to be predictable. Therefore, Rajan might have swerved from his earlier consistent path of fighting inflation.

Inflation risks have not subsided. RBI's objective is to achieve 4% (plus or minus 2%) consumer price inflation rate. The economy is now within this range. However, low commodity prices (particularly oil) may not last. Impact of unfavourable SW monsoon is yet to be assessed. Raghuram Rajan has taken an uncharacteristic risk.

RBI's call on uncertainty

Yet another monetary policy review by RBI took place on Tuesday, the 4th of August. RBI schedules most of its monetary policy reviews on Tuesdays.

Policy rates and Reserve Ratios remain unaffected. Inflation expectations by households (three-month ahead and one-year ahead) are inching up. This could be one of the key factors that precluded reduction in policy rates. After all, it is not a secret that expectations by households are more realistic than those by professionals.

What was surprising was the Governor's optimism on reduction in uncertainty.
" Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions."

Don't we know that no sooner that one uncertainty is resolved, than another one readily crops up? For example, the declining trend in oil prices may see a drastic reversal if and when the IS takes over some oil fields.

The Governor also made a debatable comment on merits of a committee. According to him, the proposed Monetary Policy Committee will come under less external and internal pressure than the Governor. Really?
Committee's independence depends on its members. If most of the members are nominated by the government, it is self-delusional to expect the Committee to be really independent.

It appears that the Governor prefers an 'accommodative stance' towards the government.

Indian Financial Code: Defanging RBI?

FINANCE MINISTRY has released a revised Draft of Indian Financial Code (IFC) seeking response from the public. Proposed IFC is an offshoot of recommendations made by Financial Sector Legislative Reforms Commission. The clauses dealing with Monetary Policy function have attracted media attention with critics arguing that Finance Ministry is trying to emasculate RBI in the latter’s exercise of its authority to regulate monetary policy.

Part XI of the Draft deals with RBI. There are 5 chapters (chapters 64 to 68) in this Part. These chapters contain 36 clauses (cl 250 to cl 285). Clauses relevant for this discussion are detailed below with brief comments on their implications.

Clause 250: “The objectives of the Reserve Bank under this Part are to,

(a) formulate and implement monetary policy; and

(b) carry on other activities of a central bank, including ——-“

Comment: Formulation and implementation of monetary policy do not constitute objectives. These are the functions of RBI.  RBI’s objectives ought to be in the nature of, say, maintaining domestic price stability or external value of the rupee.

Clause 252: “The quorum for a meeting of the Reserve Bank Board will be half the total number of members of the Reserve Bank Board, –

(a) at least one of whom must be the Reserve Bank Chairperson; and

(b) in the absence of the Reserve Bank Chairperson —–“

Comment: At present, RBI is headed by the Governor. Is the position likely to be re-designated as Chairperson? (Bank of England has a Governor and the Federal Reserve Board of the US has a Chairperson). What is meant by ‘at least’ one of whom? Is the Ministry envisaging multiple Chairpersons? This seems to be an oversight. ‘At least’ needs to be deleted.

Clause 255: “Determination of inflation target:  Inflation target for each financial year will be determined in terms of the Consumer Price Index by the Central Government in consultation with the Reserve Bank every three years.”

Comment: It is a moot question who should determine the inflation target, the government or the monetary authority?

Clause 256: “(1) The Reserve Bank must constitute a Monetary Policy Committee to determine by majority vote the Policy Rate required to achieve the inflation target.

(2) The Monetary Policy Committee will comprise –

(a) the Reserve Bank Chairperson as its chairperson;

(b) one executive member of the Reserve Bank Board nominated by the Reserve Bank Board;

(c) one employee of the Reserve Bank nominated by the Reserve Bank Chairperson;

and

(d) four persons appointed by the Central Government.”

Comment: By virtue of this clause, the Central Government usurps RBI’s existing authority to decide on Repo Rates. Four out of seven members of the Committee are appointed by the Government and so the majority decision means the Government’s decision.

The rationale for vesting the power to decide on Policy Rates with the central bank is that it will be more objective than the government and it will be guided more by economics than the popularity of its decisions.

Clause 262: “(1) The Reserve Bank must provide all information to the Monetary Policy Committee that may be required to achieve the inflation target.”

Comment: This may land RBI in an embarrassing situation. Very often we come across situations where relevance of any particular information becomes known only after the decision is taken and its consequences felt. Therefore it is better to stipulate that RBI must provide all information that is required by the Monetary Policy Committee.

Relationship between Finance Ministry and RBI is fragile even during the best of times; Finance Ministry need not further stir up the hornet’s nest by amateurish attempts to weaken RBI. 

If this Draft is accepted, the consequences will be a) the Finance Ministry will decide on the inflation target, b) the ministry and its proxies will decide on policy rates and c) RBI will be held accountable for ensuring that inflation targets are achieved. RBI will have accountability without authority.

A setback for RBI?

RBI is one of the few central banks which ensure scrupulous compliance with various norms pronounced by Bank for International Settlements (BIS). BIS is an international organization that fosters global monetary and financial cooperation and serves as a bank for central banks. RBI is legitimately proud of its record of complying with the requirements of BIS even unmindful of being ridiculed as being holier than the Pope.

RBI, therefore, was not pleased when the Basel Committee on Banking Supervision (BCBS) recently released an assessment on Basel III implementation by India and South Africa, on behalf of BIS. India has been assessed only as “largely compliant” regarding implementation of the Liquidity Coverage Ratio (LCR) standard whereas South Africa has been assessed as compliant. Assessment grades are 1) compliant (L), 2) largely compliant (LC), 3) materially non-compliant (MNC !, exclamation intended) and 4)non-compliant (NC).

Earlier, BCBS had assessed the implementation of Hong Kong and Mexico as compliant for LCR standard. LCR is defined as the proportion of High Quality Liquid Assets (HQLA) to total net cash outflows over the next 30 calendar days under defined conditions of stress, expressed as a percentage. LCR came into effect on 1^st January, 2015. The minimum requirement for banks is 60% now, progressively increasing by 10% every year. Thus, LCR has to be 100% by 1^st January, 2019. It is worth noting that Basel III gives more prominence to liquidity and thereby corrects an unintended mistake that occurred in earlier Basel documents, a mistake that was realized only when quite a few banks started going bankrupt during the 2008 global crisis despite the apparent promise of adequate capital.

To qualify as HQLA, assets need to be unencumbered in addition to being easily and immediately convertible into cash without loss of value. Hence these assets satisfy the criteria of low risk, ease & certainty of valuation, low correlation with risky assets, listing in developed & recognized exchange, active & sizable market and low volatility.

The reason as to why India is not assessed as (fully) compliant in relation to LCR is that RBI treats State Government Bonds as HQLA whereas BCBS gives this status only to Central Government Bonds. RBI has taken up with BCBS that State Government Bonds in India satisfy the requirements of HQLA and as such must be treated as high quality liquid assets. BCBS is not yet fully convinced. It appears that the view of BCBS is not without merit. RBI may take consolation from the fact that banks’ investment in State Government Bonds is much less when compared with Central Government Bonds. Nevertheless, it is not a pleasant situation for RBI which jealously guards its reputation as a fully compliant constituent of BIS, to be told that some other central bank is implementing a part of Basel III in a better way. It will be interesting to watch if RBI would modify its position on State Government Bonds.

CRR and Repo rate

A PTI report  says,

"Dismissing IBA’s demand for a CRR cut to better help banks reduce lending rates, RBI Governor Raghuram Rajan on Tuesday said the mandatory ratio would continue to fetch them zero interest, and cutting the key repo rate in fact helps them better to reduce cost of funds.

“I don’t understand this discussion on CRR or the cash reserve ratio that sometimes comes up...this is a question that some bankers raise occasionally, saying cut CRR. I think it should be recognised that CRR is primarily a monetary instrument,” Rajan told analysts and researchers at a post-policy con-call.

It can be recalled that Mr. Rajan had in April termed the demand for CRR cut as ‘irrelevant’. Even after this, Indian Banks Association (IBA) Chairman and head of State-run Indian Bank T.M. Bhasin had called for a CRR cut.

“If you want to reduce the cost of capital and reduce lending rates, the more direct instrument to use is the policy rate which we have used,” Mr. Rajan said, adding that a 1 per cent cut in the CRR would help improve a bank’s cost of funds by 0.08 per cent, while similar reduction in the repo rate had the potential to reduce it by an equal measure.

The Governor added that the mandatory cash reserve ratio (CRR), under which the banks have to park 4 per cent of their deposits with the RBI as a mandatory solvency measure, would continue to fetch no interest for them.

“It is absolutely necessary to keep it uncompensated because that is the way we essentially drive the monetary policy transmission through the credit multiplier,” he said.

“We have surplus liquidity in the system as there has not been much credit offtake so repo window does not give banks any advantage as we don’t borrow from banks at this point. So, the CRR window helps us bring down cost of funds.

“We expect and will request 0.5 per cent cut in CRR which would release about Rs.40,000 crore in the system,” Mr. Bhasin said. He repeated the same in a statement in his reaction to the policy on Tuesday.

Retorting to this, Mr. Rajan said, “which is more beneficial? A 25 bps (repo cut) or a 25 bps CRR cut that the bankers keep talking about. Clearly, it is the 25 bps cut in the policy rate. I don’t understand this discussion on CRR that sometimes comes up.”

SBI had been repeatedly lobbying for a CRR cut and there was a very strong exchange of words between the past SBI Chairman Pratip Chaudhuri and the former RBI Deputy Governor K.C. Chakrabarty regarding the same. Mr. Chaudhuri had even demanded abolition of the CRR terming it as dead money."

RBI Governor's view is puzzling and apparently obstinate. RBI can consider reducing CRR alongwith a drop in Repo rate. It is not an either-or issue. If Cash Reserve Ratio is brought down from the existing 4% , banks will have more funds to lend and therefore interest rates for borrowers will come down. RBI's intransigence on CRR is self-defeating. It is not an issue of which instrument (CRR or Repo rate) is more beneficial or more powerful. RBI needs to look at them as complementary tools.

Black Money and Bubbles

RBI Governor, Raghuram Rajan whose name is often mixed up as Raghuraj Raman by Manmohan Singh (Mansingh Mohan?), was recently speaking to a news channel. He expressed his well-known mantra that RBI does not want to flip- flop in administration of interest rates. Therefore, he would rather wait till softened inflation becomes sustainable before deciding to reduce the Repo rate.

This conservative strategy is not necessarily a wise strategy. In the stock exchange, one cannot time the market. Similarly, money market also does not respect timing strategies. However, given RR's standing, very few people would point out that he is without clothes even if he is naked.

He pointed out how RBI was trying to prevent formation of bubbles in real estate. He referred to insistence of a minimum stake of borrower's equity stake in purchase of house. Ceiling for debt amount and floor for equity preempts bubbles.

Usage of black money in purchase of real estate, he said, further bolstered the equity. The Governor is bold enough to accept the almost universal reality of black money in such transactions. This, of course, is not a justification of black money. The government should take some strong measures against black money. Clarion calls from the judiciary alone will not do.

Restructuring at the RBI

Reserve Bank of India has of late issued a spate of circulars on credit restructuring. Now it is going one step further and contemplating an organisational and HR restructuring to cope with emerging economic realities. In a jargon-studded notification, the RBI says:

"The Reserve Bank has been deliberating on a broad Human Resources (HR) restructuring exercise. The purpose of the exercise has been to align the organisational resources and structures of the Bank with the needs of the domestic economy and changes in the external environment.

The proposals essentially revolve around bringing functional synergies in operations by grouping departments into clusters and also leveraging human resources to bring about greater professionalism and specialisation so as to enhance the effectiveness of the Bank’s operations and policy making. The proposals involve professionalization of HR functions in the Reserve Bank, including a more effective Performance Management System and responsive and proactive skill and leadership development programmes.

The restructuring proposals and the grouping of departments into five functional clusters have been widely discussed at various levels in the Reserve Bank. One of the proposals envisaged the creation of an additional position of a Chief Operating Officer of the rank of Deputy Governor to head one of the five functional clusters.

The proposals were discussed in the Reserve Bank’s Board meeting. The Board approved the broad contours of the proposals. It advised the Reserve Bank to operationalise the restructuring, while taking into account the need to continuously keep communication channels open with stakeholders as the process moves forward. It also asked the Reserve Bank to initiate a dialogue with the Government on the additional post of Deputy Governor and the legislative changes that will be needed. The Reserve Bank will proceed further in the matter keeping such advice in view."

The economic media have been unsparing in their observation that the RBI Governor is trying to bring in his friend and classmate, Nachiket Mor as RBI's COO. Mor could be an apt choice.

But this move raises an interesting statistical puzzle. Isn't casting the net wider a saner alternative than confining one's search to one's classmates or friends? Cronyism among regulators may not be much better than crony capitalism. One may expect Nachiket Mor who stayed away from consideration as ICICI Bank CEO to preempt the Governor's suspected move to rope him in.

RBI Governor

Subramanian Swamy has demanded that Raghuram Rajan should be replaced as RBI Governor. His reasoning is a bit strange. We need to prove, he says, that India-educated economists are equally competent. He has suggested the name of Prof.R.Vaidyanathan of IIM, Bangalore. Vaidyanathan's recent book titled 'India Uninc' is well received in the market. He did his doctorate in IIM, Calcutta and has been teaching in IIM, Bangalore for a long time.

There is obviously no doubt about Vaidyanathan's credentials. But is it necessary to rock the RBI boat now? Narendra Modi is too much of a pragmatist to do that now. The IIM professor's views on many economic / banking issues are totally different from Rajan's. This is not strange since no two economists are expected to hold similar views.

Having said this, it is not necessary to trash Swamy's opinion. The government can take advantage of divergent thoughts by making Vaidyanathan a member of RBI board.

RBI Governor's cheek

Raghuram Rajan while addressing an IMF meeting in Washington claimed that huge banking reforms are on the anvil in India. He said that foreign banks will soon be permitted to take over Indian banks.

One wonders whether the Governor has been correctly quoted because change in ownership of banks is beset with political and legal implications. RBI Governor of the day cannot arrogate to himself the authority to pronounce, suo moto, on such matters.

Such hasty declarations by persons in authority ultimately undermine the credibility of the government.

Governor vs Dy.Governor: Clash of views or tactical manoeuvre?

The Economic Times reported on 4th October that a decision has been taken to advise state-run banks to provide cheaper loans to fund purchases of autos and durables. The decision was taken at a meeting between Finance Minister, Chidambaram and RBI Governor, Raghuram Rajan.

The Hindu reports on 6th October that Deputy Governor of RBI, K.C.Chakrabarty has observed that "no one can force" lenders to selectively cut rates. He added, "It is not a prudent measure to increase consumption by lowering interest rates. Cheap loan plan can impact asset quality of banks".

What is really happening? Prima facie, it appears that Rajan and Chakrabarty have contradictory views on the proposed measure. If so, Chakrabarty need not have embarrassed the Governor by voicing his differing opinion publicly a la Rahul Gandhi. Chakrabarty is a mature person and therefore this interpretation is wrong.

What is more likely is that Rajan has been bamboozled by the minister into agreeing to his view. Despite his learning, Rajan is still a babe in the political woods and he is not yet Y.V.Reddy who could stand his ground whatever be the pressure on him. Has Rajan sought a favourable 'dissent' from Chakrabarty so that Rajan can stave off ministerial coercion?

Raghuram Rajan

Raghuram Rajan has started off well in RBI with an initial statement that is both brief and meaningful. His determination to stick to what he perceives to be right comes out clearly from his reference to Rudyard Kipling's 'If ':

"If you can trust yourself when all men doubt you, But make allowance for their doubting too:

Kipling’s reference to “men” only dates these lines, but his words are clear."

Rajan's message is subtle, but clear. He is ready to be different from others and yet he will relentlessly fight against forces of exclusion. One cannot avoid the thought that a person like Rajan would be a lot more beneficial to the nation as, say, prime minister rather than RBI Governor.

The Governor is accurate when he says, " The Reserve Bank is a great institution with a tradition of integrity, independence, and professionalism." But when he follows it up by adding, " To the existing traditions of the RBI, which will be the bedrock of our work, we will emphasise two other traditions that become important in these times: transparency and predictability", he is perhaps unwittingly uncharitable to his predecessors. RBI has never been opaque in its functioning. Its decisions have generally been logical and reasonable and therefore predictable though not always to the liking of Finance Ministers.

Further, one does not start a tradition. One may start a practice and if it becomes consistent over a period of time it turns into a tradition.

What is the meaning of the following sentence?

 "The RBI will give out new bank licenses as soon as consistent with the highest standards of transparency and diligence." Rajan did pause for a while when he read this. Some word has apparently been missed out.

India's Foreign Exchange Crisis

Rupee continues to be on a downward spiral. Finance Minister's expedient bravado that we are not helpless has few takers. Desperate steps taken by RBI indicate that the central bank also is at its wit's end.

RBI has initiated many steps to encourage larger inflow of External Commercial Borrowings. These are short-sighted and are likely to cost us heavily in the future. Similarly, various decisions on gold imports taken by RBI as well as Ministry of Finance are dysfunctional and are apt to lead to more smuggling of precious metals.

Government's inability to provide conducive governance for industrial progress and enhanced exports is the main cause for currency turbulence. Awkward manipulation of time-tested guidelines will only queer the pitch further. Lack of good governance adversely impacts the country's economy in diverse ways.

Raghuram Rajan: Some conspiracy theories

Vitiated political environment invariably produces many conspiracy theories about any move by the government. Many onlookers are surprised that the next RBI Governor's name has been declared three months ahead of Subba Rao's departure and on top of that he would join the central bank immediately. Inevitably some conspiracy theories contradict each other.

Theory 1: Chidambaram was batting for Arvind Mayaram, his confidante in Finance Ministry. PC was bringing pressure on Manmohan Singh. The PM was not for Mayaram. So , before pressure could build up further via Sonia Gandhi, Singh decided to preempt PC. How credible is this theory? Does Singh ever take fast decisions? Isn't Chidambaram a cheetah and Manmohan only a mouse?

Theory 2: Rajan as advisor to Finance Minister was more an impediment to PC since he was too independent. So PC was looking for a quick opportunity to dump him. Rajan would hopefully (for PC) be less of a nuisance at Mint Street than in North Block. Despatching Rajan as OSD for three months lends credence to this theory. Antithesis: Is PC so myopic?

Theory 3: How did the IAS lobby allow a non-IAS to become the Governor? Of course, there have been many Governors of RBI who were not 'blue blooded'. This time the civil servants deliberately let one not from their clan to become the Governor as they know very well that the present economic situation is too perilous to be managed successfully by RBI. It suits them that an IIT, IIM, MIT alumnus who also taught at Chicago and worked for IMF would get his hands dirtied and reputation sullied so that the government would become 'wise enough' next time to fall back on the 'infallible' IAS folks.

Theory 4: PC had recommended Vinod Rai for the post of CAG. Once appointed, Vinod Rai was not 'grateful'. So this time PC was not interested in pushing his candidate (Mayaram) too far. Rajan was nobody's candidate. Sometimes, it helps if one is not sponsored by anyone.

You may choose your pick. 

Raghuram Rajan as RBI Governor

Government of India has done well in appointing the famous financial economist as next Governor of RBI. It is a different question however whether he will be successful in the new assignment. Nowadays, in the VUCA milieu, any person in charge of economic / financial affairs will have to keep his / her fingers crossed after taking any step in the dynamic environment.

RBI's Governor is successful if circumstances match his skills and not the other way round. Y V Reddy and Subba Rao have similar views and skills. Yet, history will record that Reddy was successful and Rao was not. This is because circumstances existing during their respective periods were different.

Raghuram Rajan did foresee the 2007 global crisis. This does not necessarily mean that he can and will predict the next crisis also. Any economist would agree that economic predictions are only as good as astrological forecasts. We can only predict the past!

Rajan does not carry any political baggage or administrative chip on his shoulder. If he refuses to capitulate to  political pressure and keeps his objectivity alive in all tricky situations, probability of his success as Governor will get enhanced.