Talks Today On Rajan's Successor, The Boxes PM Modi Will Seek To Check

Prime Minister Narendra Modi will hold discussions today on the choice of a successor to Reserve Bank of India Governor Raghuram Rajan whose term ends in September. 

Traditionally, the prime minister picks the RBI governor after consultations with the finance minister.

PM Modi needs to juggle competing demands from within his own party, the economy's need for more stimulus and investors' demands for an independent thinker.

Global and Indian investors are on edge with reports that Prime Minister Modi could select the new governor of the RBI this week. 

Outgoing RBI Governor Raghuram Rajan stunned financial markets last month by announcing he would step down after a single three-year term to return to academia.

Dr Rajan was held in high esteem for defusing a currency crisis, cutting interest rates and overhauling the way the RBI operates, including introducing inflation targeting. But his sudden exit after persistent criticism from BJP law-maker Subramanian Swamy and right-wing affiliates has raised questions about the RBI's independence.

That has made the choice of the next RBI governor critical.

Of the candidates widely seen as on the short-list, three insiders - current Deputy Governor Urjit Patel and former Deputy Governors Rakesh Mohan and Subir Gokarn - would likely easily pass that muster, and are seen by markets as ensuring both policy continuity and the RBI's independence.

"The candidates from RBI (Gokarn, Mohan, Patel) would have been considered steady hands that would continue current Governor Raghuram Rajan's inflation targeting framework (and be the least disruptive)," BNP said in an email to clients on Tuesday.

Less certain is State Bank of India chair Arundhati Bhattacharya. She is a career commercial banker with no economics background, but may be seen as an ideal candidate with the inside know-how to best deal with $130 billion in non-performing loans weighing on the banking sector.

But PM Modi will also need to reconcile market demands with those from forces within his own administration.

As with previous governments, PM Modi and Finance Minister Arun Jaitley are bound to prefer somebody who is more accommodating on interest rates, especially given the new governor's term should run through the government's re-election in around three years.

Dr Rajan was widely seen as hawkish on inflation, though the RBI has cut rates by a total of 150 basis points since last year. Recently he turned more stubborn on the prospects of further easing, complaining Indian banks were not passing along most of the RBI's rate reductions to companies and consumers.

Meanwhile, the Rashtriya Swayamsevak Sangh (RSS), the ideological mentor of the ruling BJP, is keen on a candidate who does not seek the limelight - an accusation often thrown at Dr Rajan by some officials.

Some media reports said that PM Modi's policy adviser Arvind Panagariya was a potential surprise front-runner. His candidacy could raise uncertainties in markets because of his perceived closeness to the Prime Minister. He is also seen as close to the RSS and BJP President Amit Shah.