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Urjit Patel's Resignation as RBI Governor Could Precipitate Crisis of Confidence in Modi Govt

Not only does this single action of Patel emphasise, more than ever, that he wanted the independence of the central bank upheld at any cost, it also ensures that this difficult and acrimonious debate will now assume centre stage.

Sindhu Bhattacharya |

Updated:December 10, 2018, 7:09 PM IST
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Urjit Patel's Resignation as RBI Governor Could Precipitate Crisis of Confidence in Modi Govt
Urjit Patel resigned as RBI governor on Monday. (Reuters)
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New Delhi: Urjit Patel has resigned as the governor of India’s central bank and the government has a crisis of confidence on its hands. The resignation of Patel was being speculated upon for quite some time though he was initially seen as being in broad agreement with the government at the Centre. The first buzz of a possible change of guard came a few weeks back, with reports suggesting that he may quit after deep differences between the RBI and the government surfaced. The Centre and the RBI have had some significant differences of opinion and almost all issues on the table called into question the independence India’s central bank had traditionally enjoyed from the government of the day.

Why Patel’s resignation is nothing short of a crisis is evident. Not only does this single action of Patel emphasise, more than ever, that he wanted the independence of the central bank upheld at any cost, it also ensures that this difficult and acrimonious debate will now assume centre stage. Besides, the timing of the resignation also is quite unfortunate for the government, since it comes just a few hours before the Winter Session of Parliament is slated to begin.

The Opposition, which has been gunning for the government in the tussle between the RBI and the Centre, is unlikely to let this burning issue smoulder. Then, India is already grappling with slowing economic growth and a change of guard at the central bank — which not only devises the crucial monetary policy but also analyses broad macro trends — and that is certainly not good news. We are faced with a jobs crisis, widening trade deficit and the government seems to be struggling with its own target of fiscal deficit as the fiscal end nears.

Last but not the least, the government’s choice of the successor for Patel would be under microscopic scrutiny — something it may have liked to avoid at the current juncture. It is likely that someone from the existing RBI board (the senior most deputy governor) may hold charge for the time being. The stock markets saw some significant selling today as speculation mounted of the ruling BJP not doing particularly well in crucial state polls, whose results are expected tomorrow. With Patel’s resignation being announced in the evening, it is possible that the markets slide further this week.

Prime Minister Narendra Modi tweeted, “Dr. Urjit Patel is a thorough professional with impeccable integrity. He has been in the Reserve Bank of India for about 6 years as Deputy Governor and Governor. He leaves behind a great legacy. We will miss him immensely.” This indicates that the government is unlikely to persuade Patel to stay back for now.

Patel’s predecessor Raghuram Rajan told CNBC-TV18 that the resignation was a “serious issue” and the government must find out what led to the resignation. He said the government must be careful in ensuring that independence of the institution must be preserved. “The act of resignation is the ultimate weapon in a government appointee’s portfolio, they do not exercise it lightly. Why did Patel, appointed by this government, exercise this option?”

So what all did the Centre and the RBI did not quite agree on?

1) The government has made it clear it wants a formula for deciding how much of the surplus with the RBI should remain with the central bank, after reports emerged that it was eyeing the over Rs 4 lakh crore surplus of the RBI to ease the slipping fiscal deficit this fiscal. A charge the government denied, saying it was capable of managing the deficit but was merely looking to devise a way for the surplus to be accounted for, in future. The Central bank continued to hold the view that none of this surplus should be given away.

2) The government wanted some of the public sector banks taken out of the lending restrictions the RBI had imposed on them earlier. This was being resisted by the RBI board, which did not agree with the government’s assessment of the health of these banks.

3) The government was unhappy with the alleged inertia the Central bank showed in easing liquidity in the NBFC sector, after the collapse of IL&FS.

The governor was naturally upset that the government had gone public with its warning of using Section 7 of the RBI Act to ensure the Central bank does its bidding. Now, as he steps down and one of his deputies may be taking over the reins, it is unlikely that the serious issues facing the RBI, its role, its structure and its autonomy go away. We are nowhere near the end of the RBI saga. In fact, a manthan may just be beginning, one with long term consequences for the Indian economy and the perceived independence of crucial institutions.

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