OPINION I Guv exit kills myth of central bank

Any semblance of autonomy is dead with Urjit Patel’s abrupt resignation from the Reserve Bank of India. He’s the second governor to depart in almost as many years, after months of poking and prodding by New Delhi. The government has trampled the central bank's independence which, although not legally enshrined, has been built up over the decades. With the country hurtling towards a general election in 2019, investors will be scrambling to reprice Indian risk.

During Patel’s watch, Prime Minister Narendra Modi sidelined the RBI when he cancelled large banknotes in a shock 2016 move that proved extraordinarily disruptive for the economy. Patel took flack for remaining relatively silent throughout. His bank was then blamed by the government for failing to properly regulate the country’s bad debt-ridden lenders when a $2 billion fraud was revealed in February. Hardly fair, given state control of most banks limits the RBI’s ability to act on governance.

Now Modi has stacked the central bank’s board with allies of his Bharatiya Janata Party and appears to be trying to shore up a fragile budget by pushing for a larger chunk of the RBI’s $100 billion of balance sheet reserves. The central bank can afford to be generous, but the funds also underpin its position as a lender of last resort in a country that is dependent on foreign capital to finance external deficits. With Patel’s exit on Monday and foreign cash flighty, such a raid looks far riskier.

A change of government may now be needed before the RBI can attract serious talent to lead the bank. That could happen as soon as May, when the nation is expected to vote. Until then, even the monetary policy committee, which sets interest rates with a view to containing inflation, is slim protection against populist moves to pump the economy.

Worse, if India’s financial institutions managed to get themselves into a funk with a relatively bold, credible regulator, then it is uncomfortable to imagine how much of a mess would result from one overly sympathetic to politicians. Modi is under pressure after several state elections late last week, which exit polls indicate have gone against him. That, though, is another reason to act prudently now.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)