NEW DELHI: In late 2014, the knives were out for India’s central bank governor Raghuram Rajan.

Finance ministry officials were frustrated by his reluctance to cut interest rates to stimulate growth, and moves were afoot to ease him out of the job. Some were airing their reservations about Rajan’s hawkish stance in the media.

Prime Minister Narendra Modi convened a meeting of senior finance ministry staff that December to hear their complaints, said a person who was present.

At the end, the leader 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 rapport, government officials and people close to the governor say, and that could be crucial to the $2 trillion economy.
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.

That would allow him to try to revive India’s banking sector that has been smothered by distressed debt, which, in turn, is choking off economic recovery.

“Rajan will get another term and he will accept it,” said Arvind Mayaram, India’s former finance secretary who Rajan worked with closely first as the government’s chief economic adviser and then as RBI governor. “He is well entrenched in India’s political economy.”

A top government official said the decision rests with Modi and the leader has not yet said what he wants to do. Modi recently told The Wall Street Journal that Rajan’s reappointment would come up only in September.

The official, speaking anonymously because he was not authorised to discuss the matter with the press, added that the prime minister was “proud” of the RBI governor and that a campaign against Rajan would not affect Modi’s decision.

The prime minister’s office and finance ministry did not respond to requests for comment. Rajan, former chief economist at the International Monetary Fund, has not disclosed his plans, and did not respond to requests for comment for this article.
MODI’S SUPPORT IS KEY Modi’s support would be important if the 53-year-old RBI chief is to get the big state banking sector to complete a cleanup of massive debts and force defaulters to pay up.

Banks making provisions for bad debt are reluctant to issue new loans, leading to criticism within the sector and complaints from smaller businesses and politicians.
Patronage from above will also help shield Rajan from lingering opposition within the ruling nationalist Bharatiya Janata Party (BJP) to a man known for his straight talking and willingness to question government policy and achievements.

As the personal understanding between Rajan and Modi appears to grow, some officials still resent him.

The fact that Rajan was appointed by the previous Congress government did not help him win friends in Modi’s BJP, and the former University of Chicago professor has been viewed by some with suspicion as a product of the West, not India.

BJP parliamentarian and economist Subramanian Swamy , one of those leading a campaign to remove Rajan, recently accused him of “wilfully and deliberately wrecking the Indian economy.”

The governor’s penchant for blunt commentary raises hackles.

Rajan’s appeal for tolerance late last year was perceived to be a veiled criticism of the government for appealing to the Hindu majority at the expense of minority communities, prompting Swamy to rebuke him for speaking like a “grandfather”.