In the end, the repeated use of the word 'sad' in the voluminous news coverage on Raghuram Rajan’s exit was striking. Why on earth would anyone use the word 'sad' to describe the exit of a central banker? 'Alarming' yes, or even 'bad', if the exit has effects – especially on markets – that are deemed detrimental. Sometimes 'good' would be used to describe an exit, though this is exceedingly uncommon in the world of central banking. 'Good' was used to describe the exit of one Viktor Gerashchenko, Russia’s central bank chief in the early 90s, who had to be told what inflation was all about; told on the job that is.

But 'sad' to describe Rajan’s exit, indicating sorrow and dolour? Perhaps it’s because of the realization that it’s difficult getting quality people in government and policy making. Perhaps it’s because of the recognition that the system simply cannot deal with talent, and that often, only mediocrities and ji huzoors, rise to the top. Rajan was an exception to this trend, and so it is 'sad' to see him go.

Few explanations

If it was a case of “nothing in his tenure became him like the leaving it”, we would understand. Such was the situation with Gerashchenko, widely described as the world’s worst central banker, and sacked as a result. But in Rajan’s case, the tenure was widely praised, in fact almost lionised. Was the wide praise then, itself the problem? The green eyed monster being awakened among certain people perhaps. But it is bizarre, as some explanations do suggest, that Rajan was somehow overshadowing Namo, the one and only star allowed in the firmament. The firmaments themselves – central banking vs politics – are totally different.

Did the gadfly Subramanian Swamy have something to do with it? Not really. Swamy is such a loose cannon nowadays, that the only sensible reaction to anything he says, is to shrug and go back to reading Asterix comics.

Reams of other explanations have been offered by the commentariat and the chattering classes, all solemnly exercising their critical sangfroid. The usual channels for disinformation were activated, ie “people who spoke on the condition they not be identified” as some newspaper reports put it. There have been the customary muddled explanations of growth inflation 'trade offs' and how Rajan got it wrong on that, and hence had to go.

Macroeconomics in India is a shady protoscience on which everybody has an opinion that is always correct; nowhere is this more apparent than in these explanations for Rajan’s exit. Another set of explanations has to do with Rajan’s forthright views on public policy issues and how they, in some way, were not expected of a central banker. Feathers were ruffled, or so the explanation goes, by these forthright views. Really? Since when were politicians the ones with thin skins? Another set of explanations has to do with Rajan’s taking on vested interests – read crony capitalists – who in turn ensured he didn’t get reappointed. This view is plausible, but simply attributes too much influence to said vested interests.

Finally, granting the extension would have continued with a hawkish governor for another two years, which brings us to 2018, or just a year before the next general election. But given that elections in India are won and lost on the prices of aloo kanda, this would have been a good thing for the government.

What was at stake here was a simple two-year extension, routinely given. All governors who preceded Rajan in the past quarter century were granted that two-year extension. Surely then the present incumbent with his storied track record would get one? What was the big deal in all this?

The actual explanation may be more prosaic than any of the above. Rajan may have been due for that extension, anyway, bu the government just wanted to make him sweat a little for it; the sweating itself being necessary to show everyone who's the boss. This resulted in a game of chicken that went a little haywire.

Let’s have a smash-up

Various versions exist in the game of chicken. The most common is two teenagers racing their cars at full speed towards one another, till one side blinks first, and veers away. The kid staying the straight course, wins. Of course, if neither side blinks, you have a nice crash. Understandably enough, the hardest part of playing chicken is knowing when to blink.

The government attempted to play the game by saying that the announcement of a reappointment would be made closer to the date of Rajan’s tenure expiry. This, in effect, would have left him dangling till the last minute, a fate Subir Gokarn another RBI deputy governor, had to recently endure. Apparently, the government does this often with bureaucratic appointments, and incumbents equally often swallow the humiliation of sitting around waiting for the fax or call. Except this incumbent, and rightly so, probably considered such behaviour unacceptable for a person of his background.

Finally, by announcing a committee to look into a replacement with Rajan’s name itself as just one of the contenders, the government continued with the game of chicken, making him sweat a little more. The committee’s formation is itself a signal being sent out, like another push on the throttle in the game of chicken. After all why appoint a committee, if this is going to be a routine reappointment?

Rajan, like the other kid revving his car engine and hurtling forward at full speed, went ahead and announced his departure. The government never even had a chance to blink in this game of chicken, and so we have a right royal smash-up. This perhaps accounts for the cluelessness of the government in announcing Rajan’s successor. The smash-up has already happened, and that too, too suddenly to even think in terms of a successor. So you have the unprecedented spectacle of a resignation without a successor in sight on the eve of a massive and widely anticipated global volatility. The departure itself was announced on the eve of market turbulence on Britain’s EU referendum; that’s as 'in your face' as it gets in central banking personality exits.

The reasons Rajan went full ahead and engineered the crash in this game of chicken may never be forthcoming. But there remains the minor matter of sabbatical policies at the University of Chicago. Rajan has been on two sabbaticals already. The first was at the IMF and the second at the RBI; both have been of three-year duration. This is about as far as universities go, and as flexible as they get, even for their rock star tenured professors. At some point the message goes out to the rock star, “Back to the groves of academe, or continue what you’re already doing”. In fact, policies tend to be pretty firm on this front.

Sabbatical is a privilege, not a right, and continued long absences are considered incompatible with the teaching and university service expectations of tenured faculty. The only exceptions are for categories like military or public service, and Rajan’s tenure at the RBI would fall into the latter category. But even for such categories, at some point, the academy’s patience also runs out, and even with the rock stars. So, an intriguing explanation for all this is that he could not have taken up the two-year extension even if he was offered it, because of sabbatical policies at the University of Chicago. So why not play the game of chicken anyways?

On ending the jugalbandi

How should the government prevent this nonsense from repeating itself in future? The only way to prevent it is to modify the RBI Act of 1934. The Reserve Bank of India Act of 1934 is colonial era legislation that needs to be adapted to today’s times. Presently, the RBI Act calls for a governor’s tenure not to exceed five years. The administrative practice has been a three-year tenure, with the 'possibility' of a two-year extension depending on the government’s whims. This is done to ensure that the incumbent knows very clearly who the boss is. The government is very happy to keep most of the RBI Act’s key provisions, because they simply don’t leave the central bank independent. That policy was okay in colonial times, but not today. In fact, despite the recent reforms dealing with the monetary policy committee, the crucial issue of the governor’s tenure was not addressed, and continues as per the Act.

The RBI Act must be modified to give a six-year tenure to RBI chiefs, instead of the current policy of three years with the 'possibility' of an extension; the current system simply encourages a revolving door governorship. What is needed is a six-year tenure with the explicit requirement that the tenure starts halfway between Lok Sabha terms. Thus, the appointment will be two and a half years into a Lok Sabha sitting, and will end well into the next Lok Sabha. Hopefully, this divorces the monetary cycle from the political cycle; it might even make the RBI less vulnerable to the routine babble on growth inflation “trade offs” that keep bubbling up in public discourse and the government. It also does away with the need for this ridiculous jugalbandi, where everybody dances around trying to figure out how independent the central bank really is.

The author is an investment advisor in Mumbai.