RBI chief Raghuram Rajan will step down after his term ends in September.
India's 'rock star' central bank governor Raghuram Rajan, feted by foreign investors but under pressure from political opponents at home, stunned government officials and colleagues by announcing he would step down after just one three-year term.
Rajan, a former chief economist at the International Monetary Fund, is held in high esteem by policymakers and investors at home and abroad for overhauling the way the Reserve Bank of India (RBI) operates.
But he has faced mounting criticism from a faction within Prime Minister Narendra Modi's ruling party for keeping interest rates high and over a perception that he had begun to stray into politics.
Markets likely to open lower
Rajan's departure was likely to roil markets on Monday, analysts said, at a time when global factors such as Britain's referendum on European Union membership are already weighing.
"It's a volatile period and as an investor I feel this was unnecessary. His term was ending in September anyway, they could have waited until then," Salman Ahmed, chief investment strategist at Lombard Odier Asset Management in London, said.
"What Mr Rajan wanted was to build a stronger institution and that cannot be one person, the market understands that. What's unnerving is the timing," he said, adding he expected at least a 1.5-2.0 percent fall in the rupee.
"My recommendation to the government is to appoint a successor as soon as possible. Mr Rajan brought a lot of credibility to that post and if we have a name with a similar CV, that will go a long way to reassure markets."
Seven candidates on long list of replacements
A senior government official told Reuters there were seven candidates on an initial long list to replace Rajan.
In a move to pre-empt concerns the government lacked a credible field of replacements, the senior official said the candidates on the long list to succeed Rajan included RBI Deputy Governor Urjit Patel and Arundhati Bhattacharya, who is chair of State Bank of India, the country's largest bank.
The others are Vijay Kelkar, Rakesh Mohan, Ashok Lahiri, Subir Gokarn and Ashok Chawla, said the official, speaking on condition of anonymity due to the sensitivity of the matter.
They are mostly veterans of the RBI, the Indian civil service or the two major global financial bodies, the International Monetary Fund and World Bank.
The official played down concerns that Indian markets might swoon on Monday.
"I'll be very frank with you - that is not our assessment," he said. "Our assessment is that, if at all, there would be some mild tremors."
In a letter to RBI staff, Rajan said he planned to return to academia, even as he noted two of his actions - the creation of a monetary policy committee to set interest rates and the clean-up of the heavily indebted banking sector - remained unfinished.
"While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on Sept. 4, 2016," Rajan wrote.
"I will, of course, always be available to serve my country when needed."
It will be the first time since 1992 that an RBI governor has departed after a single three-year term.
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