What's going on?

The highly respected head of India�s central bank, Raghuram Rajan, said over the weekend that he would not seek more time in office (due to a lack of support from India�s government). Given India�s growing significance (it�s the world�s fastest growing major economy), his departure is certainly meaningful.

What does this mean?

When Rajan took over in 2013, India�s inflation was rampant (more than 11% per year, which is very high). Inflation, essentially, means that 1 Rupee today is worth less in one year from now because prices have risen. As a result, high inflation is typically bad for the value of a country�s currency (which deters foreign investors).

Within 3 years, Rajan brought down the country�s high inflation to a much more respectable level of 6% and instituted other reforms that increased foreign investors� confidence in India. However, he faced a backlash from members of the ruling party as he sought to push reforms that were often politically unpopular.

Why should I care?

For markets: India remains in relatively good shape. In a world of very low growth, India�s 7.5% annual growth rate stands out. While international investors may be more nervous now that Rajan is leaving, markets will perhaps�reserve judgement until they hear who the new central bank leader will be. This is because India has reasonably strong fundamentals and its government is increasingly supportive of foreign investors.

The bigger picture: Central bankers can act as a healthy counter-balance to politicians. Governments like to prioritize short-term initiatives because they (often) rely on political popularity, especially in a democracy. But central bankers tend to worry about longer-term problems (like inflation). And so it�s good to have independent – and competent – central bankers in office (which investors usually appreciate).