What caused India’s central bank governor to resign?

India named a former finance ministry official Shaktikanta Das as new governor of its central bank yesterday a day after markets were jolted by the sudden resignation of Urjit Patel. Mr Patel and the Reserve Bank of India have been in the spotlight for the past month. Here is some insight on the resignation and how it might affect Asia’s third-largest economy.

Were there conflicts that led to the decision?

Mr Patel’s term was not due to end until September next year. He resigned for “personal reasons”. However, he was at loggerheads with the government of Prime Minister Narendra Modi for the past few months. India’s economy experienced cash shortages after its currency demonetisation. A key concern for the country of 1.3 billion people is the health of its banking system. The International Monetary Fund has commended the central bank for taking measures to improve the banks’ recognition of bad assets and to recapitalise public sector lenders. Mr Patel and the Modi government have been not seen eyeto-eye on matters ranging from releasing reserves to the government, policy differences on lending and the monetary policy, specifically the interest rate regime, and putting the autonomy of the central bank at stake.

What effect has the resignation had?

Mr Patel’s resignation sent the country’s weakening rupee lower against the dollar, and will negatively affect the investment climate of the country and increase uncertainty. Financial markets were hit by the news and were also affected by key state election results, which are considdred a litmus test for Mr Modi ahead of a general election next May. Initial results indicate a setback for Mr Modi’s BJP party in three key states. Mr Patel’s resignation also comes ahead of another crucial RBI board meeting, which is scheduled for Friday, where issues up for discussion include governance at the central bank. It is unclear if this meeting will still go ahead.

Who is Shaktikanta Das? He is a former economic affairs secretary from 2015 to 2017, who has worked closely with the central bank. He is currently a member of the Finance Commission of India, and the government’s representative at the Group of 20 summits. With a background in the finance ministry, he is expected to be a safe choice for the government.