Reserve Bank of India (RBI) Governor Urjit Patel resigned from his position on December 10, 2018, post a conflict between the Central Bank and Narendra Modi. The decision drew a lot of flak from Chief Ministers, party chiefs and market experts throughout the evening, with the Opposition being quick at taking jibes at both the government and Modi, and the Congress declaring it the “result of our chowkidar’s assault on democratic institutions.” Notably, Patel has resigned just before the upcoming RBI Board Meeting, which was scheduled for December 14.
Urjit Patel has cited personal reasons for stepping down. Urjit Patel, 55, who took over as the 24th Governor of the Central Bank on September 5, 2016 had the shortest tenure since the year 1992. He was chosen by the BJP-led government after his predecessor, former RBI Governor Raghuram Rajan was denied a second term.
The Official Statement issued by Urjit Patel
“On account of personal reasons, I have decided to step down from my current position effective immediately. It has been my privilege and honour to serve in the Reserve Bank of India in various capacities over the years. The support and hard work of RBI staff, officers and management has been the proximate driver of the Bank’s considerable accomplishments in recent years. I take this opportunity to express gratitude to my colleagues and Directors of the RBI Central Board, and wish them all the best for the future.”
The backdrop of the RBI-Government Conflict
The government and the RBI have been at loggerheads for the past few months, over the RBI’s stance towards lenders and the economy, considering a drop in the inflation rate and signs of slower growth in the face of defaults by a major lender. Rumours were strife about Patel’s resignation after Deputy Governor Viral Acharya’s speech last month, wherein he sought to defend the autonomy of the RBI over several issues pertaining to the liquidity, credit flow and the controls governing weak banks.
Calling the resignation of RBI governor Urjit Patel as a mark of protest, former Raghuram Rajan reportedly said that the government needs to understand what prompted the resignation of Urjit Patel.
10 Things to Know About the RBI-Government Conflict
RBI Governor Urjit Patel is the first governor since year 1990 to resign from his post before the term ends. Patel’s three year term was supposed to end in September 2019.
1. The disagreement first came to light after Viral Acharya claimed in a speech on October 26 that the government’s efforts in denying the Central Bank’s independence would be “potentially catastrophic” for the country.
2. The cause of the RBI-Government conflict is supposedly the Section 7 of the RBI Act, which empowers the government to issue directions to the Central Bank as a “last resort.” As per the former RBI Governor D Subbarao, the provision has never been used before.
3. The government, in the light of this provision granted to it, reportedly wanted to control lending rates and control the reserve cash kept in RBI coffers. The RBI, on the other hand, maintained that a step like this would render the country’s economy into disarray if in case a financial emergency arises.
4. The RBI holds Rs. 28,724 billion in reserves, including foreign currency assets, gold and sovereign debt receipts, besides profit earned through interests on the bonds lent to the government. The government, however, wanted more for spending on welfare programmes ahead of the Lok Sabha Elections.
5. Acharya had said in his speech that undermining Central Bank’s independence would prove to be catastrophic. “Sooner or later incurring the wrath of financial markets and igniting economic fire,” said Acharya. He also quoted Argentina’s example in his speech, highlighting how it had witnessed a market revolt and surge in bond yields in 2010 due to a similar issue.
6. There were differences cropping up between the RBI and the Centre on issues like RBI’s weak handling of the public sector banks and its ways of resolving bad loans in the power sector. The government had reportedly asked the RBI to ease lending restrictions on around 11-state run banks with low capital bases.
7. The Centre has proposed changing rules in order to scrutinise the activities of the RBI closely. This was a move which was looked upon as undermining investor confidence in the country’s economy.
8. Negotiations between the RBI and government ensued with a nexus reached, but with both parties internally dissatisfied. Post a 9-hour Board Meeting on November 19, 2018, the RBI agreed to study a demand for sharing a part of its reserves with the government.
9. The Opposition and a few NDA parties like the Shiv Sena reportedly exhorted the RBI to not give in to the government’s pressure. “Hope Urjit Patel has a spine and will show PM his place,” Congress President Rahul Gandhi said before the board meeting last month.
10. Former RBI Chief Raghuram Rajan also made a case for Reserve Bank autonomy, saying ‘The Central Bank is as important as a seat belt is to a car.” After Patel’s resignation today, he stressed that development should be a “cause of concern” for all Indians.
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