Urjit Patel resigns as RBI governor, citing personal reasons

The timing of Patel's resignation is crucial. It comes four days ahead of the RBI’s scheduled board meeting on December 14, slated to discuss several contentious issues. Patel has cited “personal reasons”, but it is anybody’s guess why he chose to pull the plug.

“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,” Patel said.

Since August, the RBI’s relationship with the government has been anything but cordial.

The government did not state the reasons for Patel’s resignation. “The government acknowledges with a deep sense of appreciation the services rendered by Dr Urjit Patel to this country, both in his capacity as a governor and the deputy governor of the RBI. It was pleasure for me deal with him and benefit from this scholarship,” Finance Minister Arun Jaitley tweeted.

Patel’s deputy Viral Acharya first flagged the government’s reported attempt to tread onto the central bank’s territory.

The RBI Act, the key legislation that defines the central banks functioning, role and reporting relationship with government, has become part of mainstream public discourse, with a strong body of opinion on both sides of the fence.

The key question is: What triggered the resignation?

Has the finance ministry again written to the RBI seeking to invoke “Section 7” of the RBI Act that allows the government to ask the RBI take certain decisions after consulting the central bank?

Has the finance ministry sought more funds from the surplus RBI capital to plug its fiscal deficit?

The finance ministry wants the funds need to keep rolling for NBFCs, not just to keep the big projects on track, but also to add fuel to India’s consumption spending machine, as well as to aid the small traders and businessmen.  The RBI has made it clear it doesn’t believe that NBFCs need more funds now. Has the government again written to the RBI to open a special window of credit to NBFCs?

One would never know, until one of the two parties clearly states it.

After a marathon board meeting that lasted more than nine hours on November 19, RBI made concessions on capital adequacy of banks, while two contentious issues of transfer of surplus reserves and relaxing norms for weak banks were referred to committees.

The board has advised RBI to let banks recast loans up to Rs 25 crore given to micro, small and medium enterprises (MSMEs).

One would have expected that the festering tension between North Block and Mint Street would have blown over without serious consequences. That’s not quite case, it now appears.

It is one thing to be the deputy, and quite another to be at the helm. In current times, there perhaps cannot be a better person than Patel to describe the contrasting experience between the two.

Patel took over as the RBI Governor on September 4, 2016, after serving nearly four years as Deputy Governor, carving out a role of a 'go-to' person on key policy matters for Raghuram Rajan, his immediate predecessor as India’s central bank chief.

The stint as Rajan’s deputy gave him a ring side view of what the job of the RBI governorship entails: an experience that may have come handy very early on in his tenure.

Globally, most central banks have one principal responsibility: to guide the course of money and credit. The RBI, however, has to carry out a few other tasks: it is the banker’s banker, the government’s debt manager and lender of last resort as well as the banking regulator. Some of these roles can pull the central bank in opposite directions.

It is anybody’s guess which of these functions Patel would have found the most challenging and the most rewarding in the last two years.

What is clear, however, is that Patel is his own man, who hasn’t hesitated to mince words. Demonetisation is a case in point.

Patel steadfastly chose to ignore repeated calls by Parliamentarians, politicians, and experts to disclose the volume and value of outlawed Rs 500 and Rs 1,000 notes that people returned during the 50-day window till December 30, 2016.

He did disclose it eventually, but in a manner that he perhaps thought was most appropriate: in the RBI’s Annual Report for 2017 and 2018.

The disclosure came without any interpretative flourishes, in the form of pithy numbers—99.3 percent of the Rs 15.3 lakh crore of demonetised notes came back to the banking system.

This was quite unlike his predecessor Rajan, who did not dither to comment on non-economic and non-central bank related matters.

Inflation focus

It was only fitting that Patel, as RBI governor, oversaw India’s transition to a new interest rate decision system that established the primacy of price control as the central bank’s main responsibility.

In January 2014, Patel had headed a committee that recommended targeting retail inflation within a well-defined monetary policy structure. Under the new framework, the government set a retail inflation target of 4 percent for next five years, with an upper tolerance level of 6 percent and lower limit of 2 percent.

Barely a month into office, Patel presented his maiden monetary policy review, amid mixed signals from the broader economy. Unlike his predecessors who had the final say on interest rate cut decisions, he became the first governor to go by the advice of a newly set up six-member Monetary Policy Committee (MPC)

North Block blues

On more occasions than one, Patel made clear his unease about North Block’s (Finance Ministry) attempts to get overbearingly close to Mint Street (RBI).

In December 2016, even as the world’s largest currency culling exercise was underway, RBI in an unexpected hawkish move kept its policy rate unchanged at 6.25 percent dashing hopes of lower borrowing costs to arrest the demonetisation-induced slide in spending and investment.

Two months later, in February, Patel conceded demonetisation’s 'transient' impact on spending and investment, and in the MPC meeting voted for a status quo on rates, choosing to ignore calls from business leaders for cheaper loans.

He clarified that he was in favour of low inflation to persist longer before reducing rates, and changed the monetary policy stance from 'accommodative' to 'neutral', meaning lower scope for a rate cut in the near future given growing inflationary risks.

There was also an instance in June last year when a Finance Ministry official favoured a meeting with MPC members days before the monetary policy review. “All MPC members declined the request,” Patel said at the post-policy media interaction, clearly conveying to the government where the buck stopped.

In another instance, days after RBI held rates in June last year, the Chief Economic Adviser Arvind Subramanian said falling inflation rates warranted a rate cut and RBI had erred on its inflationary forecasts. “There is a plausible alternative macroeconomic assessment... In this view, inflation forecast errors by the RBI have been large and systematically one-sided in overstating inflation,” a comment that Patel chose to ignore.

Earlier this year, many apportioned a large part of the blame to the RBI in diamantaire Nirav Modi and Mehul Choksi's Rs 11,300-crore defraud of Punjab National Bank (PNB).

“Regulators ultimately decide the rules of the game and regulators have to have a third eye, which is to be perpetually open. But unfortunately, in the Indian system, we politicians are accountable, the regulators are not,” Finance Minister Arun Jaitley said on February 23.

Patel responded three weeks later, in unequivocal expression. “There has been the usual blame game, passing of the buck and a tone of honking, mostly short term and knee-jerk reactions. These appear to have prevented the participants in this cacophony from deep reflection and soul-searching.”

He has been clear in communicating RBI’s discomfiture over state government-sponsored farm debt waivers. Economists and bankers loathe the idea of loan write-offs as these create a perverse incentive structure, distort the loan market and undermine the credit culture.

Economists sometimes refer to the impossible trinity or trilemma that central banks face. Three objectives—free capital movement, an independent monetary policy and a fixed exchange rate—are impossible to achieve at the same time. Only two of these goals can be achieved optimally.

During the last 24 months, Patel has encountered this trilemma on a few occasions, and it would be fair to say that he has managed to strike the right equilibrium.

He has demonstrated both the intent as well as the ability to walk the talk.