RBI Governor Resigns: The Upshot Of An Antagonistic Chemistry Between Governor & Government

urjit patelThe RBI Governor plays a crucial role in the Indian economy and that is why he along with Finance Minister represent our country at G-20 meetings. Although they sit & make critical decisions, the duo have an antagonistic relationship with each other, and sometimes ends in the resignation of the governor. For instance, the first governor of RBI, Sir Osborne Smith, before completing his term, following differences with the Government’s Member, Finance, resigned.  Same is the story of Urjit Patel who resigned as the governor of RBI against the backdrop of rising tensions between the Finance ministry & the RBI and became the first governor to have abdicated before his tenure post-liberation, though Patel cited personal reasons for his action

He was delegated as the governor of RBI succeeding Raghuram Rajan on 20 August 2016. Just two months after that, the government announced demonetization, which led to the withdrawal of 86 percent of the country’s currency in circulation. While this decision was questioned by his predecessor Raghuram, Patel maintained pin drop silence. Alas! The silence didn't last long. As the demonetization passed, Patel transformed into combatant putting a tough stand on both public & private banks, and he entered the battle against the government. Eleven weak public sector banks were put under the RBI’s prompt corrective action, restraining them from expanding till they clean-up their balance sheets. The government didn’t like it.

As the famous saying goes, ‘coming events cast their shadows before’ the doors were shutting for  Patel. The relationship entered its terminal scaffold this year. In recent months, the government & the RBI have been at loggerheads over whether the RBI has been too hawkish in its stance towards lenders and the economy was given a drop in the inflation rate and signs of slower growth, as well as in the face of defaults by a major lender. The broiling differences between the RBI and the government over various issues related to liquidity, credit flow & the controls governing weak banks including autonomy, boiled over in October.

The hard-hitting speech of RBI Deputy Governor Viral Acharya with the buttress of Patel on the need to ensure the independence of the central bank added fuel to the fire. The provocation of that speech was a letter sent by the government seeking consultations under a rare provision of the RBI Act. The provisions laid down under Section 7 of the Act, allow the government to give directions to the central banks considered necessary in public interest in consultations with the Governor. Last month, the board met for more than nine hours in Mumbai to resolve the differences, which ended on a propitiatory note. However, Patel quit ahead of a critical board meeting on Friday, that was meant to discuss the progress on issues raised by the board’s government nominees last month.

The statement issued by Patel on central bank website states, “On account of personal reasons, I have decided to step down from my current position effective immediately. It has been my privilege and honour to serve in the Reserve Bank of India in various capacities over the years. The support and hard work of RBI staff, officers and management have been the proximate driver of the Bank’s considerable accomplishments in recent years. I take this opportunity to express gratitude to my colleagues and Directors of the RBI Central Board, and wish them all the best for the future”. Although he cited personal reasons, the statement eludes the words - government, finance ministry, & more, and creates a smokescreen.

Impact On The Economy

In the near term, the financial markets are bound to be affected. In fact, Indian markets had closed for the day when the news of Patel’s withdrawal came. Speaking about the resignation and its impact, Anurag Bhatia, CEO & Head of Investments, Minance says,“This does not bode well for the RBI, the government, or the economy. There will be a knee-jerk reaction tomorrow and coupled with the election results, it is going to be a very volatile day. The effects, however, will be short-term”.

The uncertainty at the RBI and monetary management policies will weigh on the minds of market participants, especially in the bond markets, but also in equities, on foreign investors who have bet on Indian stocks, and on corporate offerings. This would mean a hit on sentiment and possibly higher cost of borrowings in the near term, and challenges in raising funds from the capital market. “The bigger issue at stake is what this means for the future of the RBI. Patel’s resignation will shake foreign and domestic trust in the RBI’s autonomy and shows that a red line has been crossed. Even if the government moves fast and appoints someone credible, the suggestion of being a government proxy will be hard to shake off,” adds Anurag.

Next Governor?

According to RBI Acts, the senior-most deputy governor who is N S Vishwanathan may be assigned his powers or a new person can be inducted. Unlike in Western jurisdictions, there is no prescribed search method to choose the RBI Governor. The Prime Minister & Finance Minister have traditionally chosen from names on a shortlist.

But the question arises, will the next governor have the same fate? The country whose rupee is witnessing a drastic downfall, prices & inflation rate are flying, GDP is fluctuating, & more, the government needs to look beyond the election perspective and form an amicable relationship with the RBI (governor) so that our economy will propel. 

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