Patel announces shock exit as RBI chief before term

POLITICAL STORM Congress says institution ‘denigrated’ by govt; Raghuram Rajan says ‘Indians should be concerned’

MUMBAI/NEWDELHI: Reserve Bank of India (RBI) governor Urjit Patel resigned from the position citing personal reasons with immediate effect on Monday, nearly 10 months before the completion of his term in September next year.

The announcement that could potentially roil currency and equity markets on Tuesday triggered a political war of words, with former prime minister Manmohan Singh saying he hoped that Patel’s sudden resignation was not a “harbinger of the [Narendra] Modi government’s attempts to destroy” the institutional foundations of India’s $3 trillion economy.

Prime Minister Narendra Modi said Patel left behind a great legacy and would be missed “immensely”. “Dr Urjit Patel is an economist of a very high calibre with a deep and insightful understanding of macro-economic issues. He steered the banking system from chaos to order and ensured discipline. Under his leadership, the RBI brought financial stability,” Modi tweeted.

Finance minister Arun Jaitley was similarly effusive in his praise for Patel’s leadership of the central bank. “The Government acknowledges with deep sense of appreciation the services rendered by Dr. Urjit Patel to this country both in his capacity as the Governor and the Deputy Governor of The RBI. It was a pleasure for me to deal with him and benefit from his scholarship,” Jaitley wrote on Twitter.

The central bank has been locked in a tense face-off with the government in recent months. A speech by RBI deputy governor Viral Acharya on October 26 blew the lid off a disagreement between the bank and the central government over monetary policy and who controls the institution’s reserves. While historically there have been differences between the RBI and the government, the extent of the rift and its public nature were unprecedented.

The government has wanted the central bank to hand over more money from the RBI reserves to help fund its fiscal deficit and give it more flexibility for spending on its plans. The RBI currently hands over profits earned from various activities in the form of a dividend. But the government also wants to tap a share of the RBI’S $48.73 billion of capital reserves. The central bank has consistently rebuffed the demand.

The RBI board, on which the government now has majority support, is seeking the formation of a committee to decide on a specific method of transferring surplus reserves. In an 88-word statement released after market hours on Monday, Patel said, “On account of personal reasons, I have decided to step down from my current position effective immediately.”

The Sensex ended 714 points lower on Monday while the rupee ended at 71.35 to the dollar, recovering from 71.45, its weakest level since November 20, and Patel’s departure could impact markets on Tuesday.

Patel’s predecessor Raghuram Rajan said the resignation should be a matter of concern for all Indians. “I think this is something all Indians should be concerned about because the strength of our institution is really important, both for growth and sustainable growth in equity and the economy,” he said.

The Opposition was more scathing in its attack on the government over the development. “With the RBI Governor’s resignation one more independent institution has fallen. The BJP has demolished every temple of modern India and if not stopped, will surely destroy India itself,” Congress president Rahul Gandhi said on Twitter.

West Bengal chief minister and Trinamool Congress leader Mamata Banerjee called it a matter of “great shock” and alleged that “institutions, from the CBI to the RBI, have become total disasters”. Andhra Pradesh chief minister and Telugu Desam Party (TDP) supremo N Chandrababu Naidu alleged that there was “pressure” from the government on the RBI to give its surplus.

Credit rating agencies indicated they were watching the development closely, though a knee-jerk reaction was unlikely.

“While the motivation for the RBI Governor’s resignation is unclear, the independence of a country’s central bank is an important consideration in our assessment of a sovereign’s institutional strength. We would consider signs that the government attempts to curtail the central bank’s independence to be credit negative,” rating agency Moody’s said in a statement. “That said, our assessment of institutional strength ultimately focuses on the quality and policy outcomes of the institutions themselves, not on the individuals leading them. We currently assume that the RBI will continue to pursue price and financial stability and implement policies towards these goals.”