India’s central bank chief resigns after rift with government

12, Dec. 2018

By Atul Ranjan

NEW DELHI, NNA - Reserve Bank of India Governor Urjit Patel has resigned, citing personal reasons amid a conflict with the government over the central bank’s independence from political influence.

“On account of personal reasons, I have decided to step down from my current position, effective immediately,” the governor said in a statement released Monday.

Patel, a 55-year-old economist, took office as the 24th governor of the RBI on Sept. 4, 2016. His tenure was due to end in September 2019.

Patel’s resignation was no surprise. Press reports said the government was urging the RBI to allow ailing state-owned banks to resume lending to small businesses and cut interest rates to spur economic growth.

The bank and the government were at loggerheads over capital adequacy standards for lenders and an exit route for banks under the prompt corrective action framework, through which the RBI monitors certain performance indicators of banks to check their financial health, Nomura Securities Co. researchers said in a report.

“While both the RBI and the government are right on various issues, the sudden resignation will lead to questions about whether the government is trying to stifle institutions,” they said.

On the impact of the resignation on investor sentiment, Nomura said the lack of policy coordination between the RBI and the government will mean a higher India risk premium, at least in the short term, in an environment where domestic political uncertainty is on the rise due to elections scheduled next year.

Vivek Kaul, an independent economic analyst, described the RBI governor’s sudden resignation as a “sacrifice” to protect the bank’s autonomy.

“The RBI governor has used the nuclear option by sacrificing himself for the cause of India’s well-respected central bank,” Kaul told NNA.

“His resignation sends a clear message to the world at large that the institutional independence of the RBI is being compromised,” he said.

The Indian stock, rupee and debt markets are likely to come under some pressure over the next few days, he said.

Mohan Guruswamy, chairman of the Centre for Policy Alternatives and a former advisor to the Finance Minister, said the resignation is a sign of a clear divergence between the RBI governor and the government.

“RBI had suffered unprecedented blows due to demonetisation (India’s move to ban high-denomination currency notes in 2016), over which RBI was not consulted,” Guruswamy told NNA.

“The RBI has had to bear the brunt of the flak that was raised due to that. I think the RBI governor thought enough is enough,” said Guruswamy.

India’s economic growth slowed after the government had scrapped 500- and 1,000-rupee banknotes in a move two years ago to crack down on corruption and illegal cash holdings. This was also aimed at shifting toward a cashless society.

According to Nomura, tensions between the RBI and the government flared up, particularly since the shadow banking crisis. The central bank has been tightening rules for non-banking financial companies.

“While the previous RBI board meeting did see a diffusion of tensions, as numerous contentious issues were referred to committees, the sudden exit suggests that conflicts remain,” said Nomura.