DH Analysis: Patel's exit dents govt's credibility

Urjit Patel

Urjit Patel's resignation may have seemed abrupt, but the fact of the matter was that he was the victim of a continuous onslaught by the Narendra Modi government.

But Patel isn't alone: He is the second governor to step down in the past three years, after the outspoken Raghuram Rajan fell foul of his political bosses and was denied a second term.

Seemingly without saying much, Patel’s resignation letter conveyed a million messages. As Rajan put it, the statement is nothing less than a "dissent note" to the government. Patel pointedly left out the government while thanking everyone else around him.

Markets might not have reacted much to this event, but the consequences of Patel's resignation are far-reaching. The stifling of the RBI comes at a time when the central government has been beating the drum for the ease of doing business. The perception will build that the government is a bully unused to being crossed, which sits oddly with any reformist credentials it may be trying to establish.


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"This government doesn't seem to care about the markets, or institutions. This will convey a wrong message to the global investors at a time when the Indian government has been pitching the ease of doing business," said a senior economist at an international financial organisation, requesting anonymity.

Analysts that DH spoke with suggest that the credibility of the government has taken a hit because of this move. Even though, on record, the government has been denying invoking the controversial Section 7 of the RBI Act, sources suggest that it has actually done so, an unprecedented step. This provision in the RBI Act empowers the government to issue directions to the RBI.

Since Patel is the second governor in a row who stepped down in a controversial circumstances, it will hit morale at the central bank and reduce the prospects of attracting good talent.

“This is certainly going to impact the morale of the banking industry. I don't think it will be able to attract good people anymore to head it, except for the fact if they want to enhance the their resumes," an analyst said.

The climate of fear can be gauged by the fact that analysts, who normally comment on monetary policy, kept eerily quiet on the exit of Patel. One of the rating agency officials confessed that the industry was the scared to say anything critical of dispensation. "You saw how they went after Moody's after its critical comments on the government. Now you can imagine, how vindictive they can be," the official said.

Many industry insiders believe that it’s just the matter of time before deputy governor Viral Acharya also puts in his papers. "Imagine, Viral had to come out in public and speak against the government. It shows the intensity of the issue," said an industry insider.

The spat between the RBI and the government became public after Acharya criticised the government for interference with the autonomy of the central bank.

After a public spat between the apex bank and the government over issues of credit to medium and small-scale enterprises (MSMEs) and allocation of the RBI reserve, the board of the central bank on November 19 decided to refer both the issues to the expert committee.

The government has been unhappy with the Reserve Bank for not doing enough to enhance credit supply to MSMEs, which it considers a crucial vote bank for the general elections of 2019. The government has been also eyeing Rs 3.6 lakh crore from the RBI reserves as a way to dole out populistic schemes in a buildup to the elections.

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DH Analysis: Patel's exit dents govt's credibility

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