The BJP strategists, who are confident that Modi’s jobs-first policy pitch will secure a strong voter mandate, suggest that they would prefer to have one of their own at the helm of the RBI.

That sets the stage for a confrontation with Rajan, who has so far enjoyed an unusually smooth ride in a country where governments often treat the RBI as a punch bag for their own policy failings.

The former International Monetary Fund chief economist is widely viewed as India’s most capable technocrat, winning the respect of investors for his handling of a currency crisis that hit Asia’s third-largest economy last year.

"It will be a big loss of face for the country and would create a negative perception among foreign investors if the BJP removes the Governor immediately after forming the government,” A Prasanna, an economist at ICICI Securities Primary Dealership Ltd in Mumbai, said.

BJP treasurer Piyush Goyal has attacked Rajan over a series of interest rate hikes intended to curb inflation, now running at double the RBI's longer-term four percent target, at a time when economic growth has fallen to its slowest in a decade.

Rajan has raised the repo policy rate three times by a total of 75 basis points to eight percent.

"Governor Rajan is only aggravating the problems and making them worse by increasing interest rates," Goyal, a leading strategist and fundraiser for the nationalist opposition party, said.

Satish Misra, an analyst at the Observer Research Foundation - a Delhi-based think-tank - said, “I would not be surprised if a government led by Narendra Modi removes the Governor. Modi does not brook any opposition.”

Good cop, Bad cop

Rajan’s policy and academic credentials qualify him as a card-carrying member of the policy jetset that gathers twice a year at the IMF’s Washington headquarters or at Group of 20 meetings.

Yet his autonomy as RBI Governor is more circumscribed than that of his counterparts in the West, who are typically nominated by the government but also accountable to lawmakers. Under the RBI Act of 1934, Rajan serves at the pleasure of the government.

“The Central Government may remove from office the Governor, a Deputy Governor or any other Director,” it says.
While no RBI Governor has been sacked in the central bank’s 80-year history, two have quit before completing their terms.

In that context, analysts interpret the verbal broadsides as a softening-up exercise intended to secure greater RBI compliance with Modi's expansionist credo.

To be sure, Rajan has moderated his rhetoric on inflation but analysts said that is more a response to cooler inflation than anything else.

Arun Jaitley, a BJP leader tipped to assume either the Finance or Home Affairs portfolio in the next government, has meanwhile avoided confrontation. When asked about Rajan in a TV interview last month, Jaitley said, “If someone is doing good job, he will certainly continue.”

Manufacturers and traders, a constituency of the right-wing BJP, have complained that the RBI under Rajan has allowed the rupee to recover too strongly with a near 15 percent rally from last year's slump, hurting India's export competitiveness.

The Confederation of Indian Industries (CII) has called for a cut in interest rates of 100 basis points and a more competitive exchange rate to support domestic manufacturers.

Savvy Operator

Rajan’s former colleagues at the Finance Ministry say he is a pragmatic and politically savvy economist who may yet find a way to work with a BJP-led coalition government that pundits say is most likely to be formed after votes are tallied on May 16.

For his part, Rajan cautions that coalition building may not go as smoothly as bullish foreign investors may expect. They have bought USD 10 billion in Indian stocks and bonds this year, driving the BSE Sensex to record highs.

“We have to be prepared for some turmoil in the event that India's next government is not stable,” Rajan said.

As long as the next government shows proper concern about the economy and the fiscal situation, Rajan added, "I would suspect that after an initial bout of turmoil there might be a reassessment which may be more positive.”

Those statements represent a careful deployment by Rajan of his credibility with markets to guard against any attempt by a BJP-led government to render his position untenable.

"It would not be easy to remove Rajan from a constitutional post," said a senior Finance Ministry official, who spoke on condition of anonymity.


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