Departure Of RBI Governor Points To Rift With Government

Following the resignation of Urjit Patel, the Reserve Bank of India’s (RBI) governor, concerns have risen on whether other top officials at the RBI will also resign, especially Deputy Governor Viral Acharya who had initially spoken publicly against government efforts to influence central bank policies.

The central bank clarified late Monday evening that Acharya has not left his post, but it goes without saying Patel’s exit signals that the differences between the RBI and the government were irreconcilable.

The RBI and the government have been at odds for some time now over various issues ranging from the use of the central bank’s reserves (the government apparently wants greater access to reserves to help fund its fiscal deficit) to the handling of banks’ nonperforming loans (with the government arguing that the stringent rules have hurt credit growth).

The government has also been asking the RBI to provide more liquidity support to help non-bank finance companies as well as small- and medium-sized firms, but the central bank has seemed wary of risking longer-term financial stability for a short-term push to economic growth. “Banks’ non-performing assets (NPAs) are expected to continue rising in the current fiscal year, having increased sharply since the RBI forced banks to proactively declare their stressed assets as bad,” Shumita Deveshwar, a New Delhi-base senior director with TS Lombard wrote in a note to clients on December 10.

And while a number of global investors have critiqued the RBI’s tough stance with regard to banks, the Governor’s resignation will still cast worry among them as it somewhat “damages the institutional credibility of the central bank.”

The rebuilding and regaining of trust in the RBI’s autonomy will depend on whether the remaining leadership in the upper ranks of the RBI remains intact as well as on who the government chooses to replace Patel.

A government bureaucrat, for instance, will do little to help shore up the RBI’s credibility whereas an eminent, independent economist with no political links will be an ideal candidate. Just a one day prior to Patel’s departure, IMF Chief Economist Maurice Obstfeld stated that the RBI’s emphasis on financial stability is correct, and “it is important for the government to heed that.”