| @ | December 11,2018

The underlying story around the sudden resignation of the governor of the Reserve Bank of India (RBI) is not about what has happened, but what hasn’t.

Dr Urjit Patel did not resign when the tussle had peaked. He had in fact dug in his heels on one of the points of contention, that is, sharing the spoils of the RBI reserves between the government and the bank. Instead of any impromptu transfer to the government, the matter has been referred to an expert committee which is putting it in the backburner for the time being. Dr Patel did not flood the system with fresh liquidity and instead chose to release money in calculated doses. The two issues of difference were, so to say, papered over.

Why then, did he choose to resign now? It may be remembered that RBI did not have the tradition of promoting deputy governors to the position of governor whenever the top position fell vacant. Earlier, for example, when the term of an earlier governor, PV Subbarao’s term was not renewed during the UPA regime, the seniormost deputy governor, Rakesh Mohan, was not elevated. Rakesh Mohan left when Raghuram Rajan had stepped in. Years earlier, Amitabha Ghosh, a former chairman of Allahabad Bank, was brought into RBI as deputy governor and when the incumbent governor left, he was elevated to discharge the functions of the governor but was quickly replaced by a next full-fledged governor.

Urjit Patel did not resign when the tussle had peaked. He had in fact dug in his heels on one of the points of contention, that is, sharing the spoils of the RBI reserves between the government and the bank.Why then, did he choose to resign now?

In case of Dr Patel he was elevated to the governor’s position straightaway. Dr Patel was an insider in more than one sense, in a way. He was with the RBI for a while and in fact headed a committee during the tenure of Raghuram Rajan, which set the mechanism to be followed for formulating monetary policy. His professional qualifications and abilities beyond doubt qualified him for the high position. His old connections with the first industrial family of the country, the Ambanis, and him being a fellow Gujarati, meant he was supposed to stay put. Possibly, the thinking was that he could be prevailed over to the dominant point of view. But then, is his departure now also is an indication of the changing alignments at these stratospheric levels?

Secondly, until now, the man who most effectively raised the pitch of the so-called clash between the government and the RBI into a public debate has not left. On the contrary, the departure of Dr Viral Acharya, deputy governor, was so far denied officially by the RBI and he remains in place. That is unfortunate.

In his enthusiasm for advocating the independence of the central bank from the government, Dr Acharya compared the Indian situation to that of Argentina when the central bank governor of that country had resigned in protest against the Argentinian government to paw on the bank’s reserves. Following the departure of the central bank governor, the Argentinian currency had crashed severely and the country was in a financial crisis.

Not that the resignation of Argentinian central bank governor was the fundamental cause of the country’s misery. It was in deep trouble before that event and the tiff between the central bank and the government was only symptomatic of the deeper malaise.

Urjit Patel is related to the first industrial family of the country, the Ambanis, and was a fellow Gujarati. Possibly, the thinking was that he could be prevailed over to the dominant point of view. But then, is his departure now also is an indication of the changing alignments at these stratospheric levels?

India did not have any similar financial crisis, apart from the sporadic liquidity crisis emanating from the defaults of the largest non-banking financial company, IL&FS. There were admittedly other issues with the financial sector, including the bulging non-performing assets of the banking sector. But if anything, the government as well as the RBI were by and large on the same page on these issues, excepting some differences in views on the liquidity crisis, which was affecting the small and medium sector particularly hard.

Fortunately for India, despite these doomsday-portrayals, the economy was not really hurling straight into a crisis or the rupee was sinking against other major currencies. If anything, the rupee had gained in strength since then and had even crossed the psychological level of low 60s in between. Even after the state election results, which, in fact, give an indication of possible uncertainties and change of regimes at the centre, did not dent the financial markets so severely, closely on the heels of the resignation the RBI governor.

The surmise is that the Indian economy is not that fragile and investors also admit that. However much the difference, someone as senior as a deputy governor in the Reserve Bank should not have taken such a sharp line in a public speech and he must have condoled for it.

The December 14 board meeting of the RBI will have to be held where some of the thorny issues were to have been discussed. It will have to be seen how the interim functioning plays out, particularly because some views would have to be taken on re-setting interest rates

Now that the governor has left a sudden vacuum, the government will have to step in to fill it. But until then, the essential function of the RBI must go on. The December 14 board meeting of the RBI will also have to be held where some of the thorny issues were to have been discussed. It will have to be seen how the interim functioning plays out, particularly because some views would have to be taken on re-setting interest rates.

At the end of the day, Urjit Patel’s term as the head of the Reserve Bank of India would surely be reckoned as one of the most tumultuous time. The sudden decision on demonetisation was thrust upon him almost immediately after he took over the reins. Certainly, some of the worst board members of the Reserve Bank were foisted upon to breathe down his neck. Without them around, the governor might not have left peremptorily. GST was introduced and the economy had to adjust to this entirely new and immensely cumbersome system to begin with. Non-banking financial sector were expanding much too fast for comfort. The bubble had burst, which RBI is accused of having failed to detect in time. But then, everything was not prickly, there were positive sides as well. After all, he had Arun Jaitley as finance minister and not P Chidambaram. (IPA)

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