- POSTED: 19 May 2014 23:37
- UPDATED: 20 May 2014 00:55
While the BJP's victory has cheered the business community, many are left wondering what that means for India’s central bank policy.
MUMBAI: India is heading for a political shift as the country will soon have a new government in place led by prime minister-elect Narendra Modi's Bharatiya Janata Party (BJP).
While the BJP's victory has cheered the business community, many are left wondering what the victory means for India’s central bank policy.
Many are also questioning whether Reserve Bank of India (RBI) governor Raghuram Rajan has a place in the administration, after some party leaders expressed discontent over his efforts to fight inflation.
The 2012 financial crisis in Europe and US had left India in one of its worst situations.
The rupee depreciated by more than 25 per cent after heavy outflows of foreign money.
The exodus was exacerbated by the country's burgeoning trade deficit.
In September last year, the Congress government appointed Dr Rajan as the head of India’s central bank.
A former chief economist at the International Monetary Fund, Dr Rajan was tasked with improving investor sentiment, strengthening the rupee and stemming inflation.
Adi Godrej, chairman of the Godrej Group, said: "He has excellent knowledge both in the government and in academia. So I think he is extremely important to the economy.
“And if we get a growth-oriented government, then working in close harness with Dr Rajan as the Reserve Bank governor, I think, will be very important for the future of economic development of the country."
Business leaders say any move to change the RBI governor could harm India's economic growth.
Gaurang Shah, vice president of Geojit BNP Paribas, said: "I think BJP-NDA (National Democratic Alliance) combined already have lot of things on hand… their hands are full.
“They don't want an additional issue on their hand which may lead to possible downgrades, if I can use that word, by foreign institutional investors -- keeping in mind that they really appreciated Dr Rajan’s appointment.
“It may also create a little bit of a sovereign rating problem because it may lead to a thought process with the global investors, especially FII's (Foreign Institutional Investors), that the BJP and NDA combined is only looking at bringing in their man."
However, there are naysayers.
They contend that Dr Rajan's approach to tighten lending rates to control inflation is affecting borrowers.
But Dr Rajan's supporters argue there is no alternative.
Mr Godrej said: "The Reserve Bank governor's position is an independent position, and I think interest rates obviously cannot be brought down if inflation is very high, so clearly containment of inflation will be a very important task both for the new government, and for the new government in co-operation with the RBI."
The BJP has dismissed reports of any disagreement between the party and the RBI chief.
In fact, very seldom in India's past has the central bank governor been replaced when a new government came to power.
Investors and leaders are pretty sure India will not stray from the norm this time.