RBI chief quits after spat with government
Impact of resignation of Patel will be felt when India markets open today
In a shocking move, India’s central bank chief announced his resignation yesterday following weeks of public tussle with the government over control of the regulator’s cash reserves.
Urjit Patel, Governor of the Reserve Bank of India, cited “personal reasons” and said he was stepping down with immediate effect.
The government was not informed ahead of the surprise move by Patel who was resisting demands to ease control over liquidity and an apparent move to relax norms to use the RBI reserves to shore up banks hit by rising bad debts. The resignation came on the eve of election results in five states where Prime Minister Narendra Modi’s party is expected to perform poorly.
The full impact of the resignation would be felt when markets open this morning and an adverse showing by Modi’s party may have a disastrous impact on the stocks. Modi attempted damage control by praising Patel in a tweet as an “economist of a very high caliber”.
Ending several months of speculation, Reserve Bank of India (RBI) governor Urjit Patel yesterday resigned citing personal reasons.
“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,” he said in a statement.
According to media reports RBI deputy governor N.S. Vishwanathan is likely to hold fort as RBI interim head.
Patel’s resignation follows several months of friction between the RBI and the government on the autonomy of the Central Bank on key monetary and credit policy issues.
The RBI and government have been fighting over the central bank’s autonomy as the central government sought to reduce curbs on lending and to gain access to RBI reserves.
The friction came to the fore when RBI deputy governor Viral Acharya warned that compromising the Central Bank’s independence could be “catastrophic”. Following Acharya’s public warning, there was speculation in the media that the government would invoke Section 7 of the Reserve Bank of India Act of 1934.
According to the Section 7 (1) of the Act, “the central government may from time to time give such directions to the bank as it may, after consultation with the governor of the bank, consider necessary in the public interest.”
In essence, it could mean the government could dictate to the Central Bank in matters of its functions such as monetary and credit policies. Faced with flagging GDP growth, the government wanted the RBI to help non-banking finance companies (NBFCs) and small-to-mediumsized enterprises (SMEs) get some liquidity support, in addition to liberalising its prompt corrective action framework and undertaking other steps to push economic growth.
Surplus funds
The dispute between the finance ministry and the RBI birthed speculation that Patel would quit on November 19 if the government insisted on utilising the Central Bank’s surplus capital to fund developmental expenditure.
In a move that appeared like a compromise between the government and the central bank, the RBI board at its November 19 meeting decided to set up a high-powered committee to examine issues related to surplus capital of Rs9.69 trillion (Dh498.36 billion) with the central bank. It also formed a panel to look at the issues plaguing NBFCs.
It is not clear, however, what triggered Patel’s sudden resignation.
Reacting to Patel’s decision Finance Minister Arun Jaitley tweeted: “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.”
Patel took charge as the RBI governor on September 4, 2016 after his predecessor Raghuram Rajan resigned on June 19. Patel’s term as RBI governor was to end in September 2019.
“Dr Urjit Patel is a thorough professional with impeccable integrity. He has been in the Reserve Bank of India for about six years as Deputy Governor and Governor. He leaves behind a great legacy. We will miss him immensely,” Prime Minister Narendra Modi said in a tweet.
The RBI and government have been fighting over the central bank’s autonomy as the central government sought to reduce curbs on lending and to gain access to RBI reserves.