Ramifications of the RBI Governor Resignation
The Reserve Bank of India’s (RBI) governor stepped down overnight. It is an unfortunate development. While the outgoing Governor Urjit Patel has cited personal reasons for his decision, it appears that the RBI’s rift with the Ministry of Finance and the government had a role to play. The independence of India’s Central Bank has come into question recently. Differences between the RBI and the Ministry of Finance have spanned several issues including the RBI’s tough stance on the banking sector’s nonperforming asset classification, the RBI’s lending restrictions on SoE Banks, and the direction of policy interest rates, and also on the control of the RBI’s reserves etc.
While the rupee, and India’s asset markets, may fall with immediate knee-jerk reaction, what we would be closely watching out for are the government’s concrete initiatives, if any, to restore investors’ confidence on the autonomy of the central bank and the importance of India’s key technocrat-run policymaking institutions. Dr. Urjit Patel’s resignation is not an isolated event. His predecessor Dr. Raghuram Rajan declined to continue as the RBI Governor for another term, rather abruptly in 2016, and Dr. Rajan has subsequently gone on record criticizing the Modi administration’s demonetization initiative. Earlier this year, the resignation of the Government’s Chief Economic Advisor Arvind Subramanian was also abrupt, and his subsequent criticism of the government’s demonetization move underscored underlying discord within the government’s policymaking infrastructure. Thus, there is a possibility of some crisis of confidence among investors, at least in the near term. India’s robust democratic political framework has historically brought in checks and balances, and we are hopeful that the core direction in reforms and economic growth will prevail and that India’s policymaking framework including the autonomy of the Central Bank will also prevail over the medium and the longer term.
– Anindya Chatterjee, Senior Vice President and Lead Portfolio Manager, Emerging Markets Select
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