In few countries would a central banker’s decision to step down at the end of his term be cause for national and even global anxiety. Raghuram Rajan is no ordinary central banker, however, and his just-announced departure demands an extraordinary response from India’s government.

The government has the right to choose the head of the Reserve Bank of India, and no individual -- not even an international financial superstar such as Rajan, who said he plans to return to academia when his term ends in September -- is bigger than the bank itself. At the same time, the circumstances of Rajan’s departure have left global investors with a few unfortunate impressions. It’s important for the government to dispel these as quickly as possible in order to shore up its credibility and the bank’s.

The first is the ugly implication that Rajan was eased out because he wasn’t “fully Indian,” in the words of Subramanian Swamy, an upper-house legislator from the ruling Bharatiya Janata Party. Rajan, of course, despite spending most of his career at the University of Chicago, is an Indian citizen; his real sin appears to have been to criticize the government obliquely in a widely publicized speech decrying rising intolerance.

The government has already signaled that this criticism is invalid -- the shortlist of replacements for Rajan reportedly includes at least one economist who’s spent much of his career in the U.S. More important, the government should make clear that whoever gets the nod will have the freedom to speak critically and pursue an autonomous RBI policy, unbound by political considerations.

David Fuller's view

India previously benefitted from the generally high regard in which Narendra Modi and Raghuram Rajan were held.  The Prime Minister will have to move quickly in appointing another highly qualified central bank governor, who needs to be seen as independent.  Modi should also confirm that controlling India’s inflation remains a priority, while also endorsing Rajan’s policies regarding India’s banks, also mentioned in the editorial above and in Bloomberg’s additional article below.