A truce that never was: The Nov 19 RBI board meeting was obviously misread

Will Urjit Patel resign? A month after the question did the rounds, the 24th Governor of the Reserve Bank of India (RBI) put in his papers at close of business hours on Monday — with immediate effect. 

While Mint Road’s differences with North Block over the level of capital held by the RBI, the contentious issue of quarantining 12 weak state-run banks, and what’s perceived as inadequate flow of resources to small enterprises were well known, the suddenness of Patel’s decision to call it a day has come as a shock.

It had been widely held after the marathon nine-hour board meeting on November 19 that there had been a frank exchange of views, and both Mint Road and North Block had agreed to sort out matters amicably. A few commentators had even termed it a “truce”. But Patel’s resignation is a clear indicator that it was not so — the good doctor had perhaps decided to stay on only to present what’s now turned out to be his last monetary policy review on December 5.

With the benefit of hindsight, Patel was after all his own man and not the “rubber stamp” he was perceived to be after his predecessor Raghuram Rajan decided to move on after his share of differences with North Block. 

This perception had gained currency on Patel’s silence after the government’s decision to withdraw 86 per cent of the currency in circulation during the note ban in 2016. 

Comparisons were made with Rajan, who had refused to back the government on such a move when he was in the corner room at Mint Road. But as the minutes of RBI’s board meeting held to deliberate on demonetisation revealed, the central bank under Patel had its reservations too.

Notions of Patel being a “yes man” dissipated conclusively after his tough stance on dud loans and corporate governance in state-run banks. It was most evident when North Block blamed RBI after Nirav Modi and Mehul Choksi gave Punjab National Bank the blushes — Patel held that Mint Road did not have the kind of powers it wanted over state-run banks. 

To drive home his point, he followed it up with a crackdown on private banks. The move resulted in several bank chief executive officers (CEOs) and managing directors (MDs) calling it a day.    

Then came the February 12 circular when banks were asked to start the resolution of stressed accounts a day after payments were skipped by borrowers; the matter is now in court. Also, the now infamous Section 7(1) in the Reserve Bank of India Act (1934) came into the spotlight after the Allahabad High Court directed the Finance Ministry to invoke it on August 27.

As for the Prompt Corrective Action (PCA), it is now clear that both Mint Road and North Block were on the same page.

For the finance ministry, it was a political call to buttress the government’s public stance of being one which had little time for crony capitalism. What’s interesting here is that the RBI, in its Trend and Progress of Banking (2016-17), was explicit that it was in December 2014, six months after the Bharatiya Janata Party-led government came in, that the sub-committee of the Financial Stability and Development Council (the chairperson is the finance minister) directed that the PCA — an early intervention mechanism — be put in place. 

It is unusual for the central bank to make mention of such matters — as to whether the government of the day was on the same page as itself — in its publication. 

It would not be out of place to surmise that by then, the RBI felt that North Block may make an about turn. It has proven to be correct.

So, is Patel’s quitting sudden? Or did we misread the tea leaves after Mint Road’s board meeting on November 19? 

Come to think of it, at the last policy review, Patel made mention of the fact that concerns over micro, medium and small enterprises had their roots in the larger economy even as a committee for micro, small and medium enterprises to look into their worries was set up. Yet another broadside was that the cash reserve ratio did not fall within the remit of the monetary policy committee (The RBI had its own issues with this committee on its composition sometime back).

In effect, was Patel signalling all along that it was not a happy marriage with North Block? It appears so. 

And just like some of his policy moves, the good doctor has caught the financial world unawares. Some Patel rap this!

 

Patelspeak

On farm loan waiver

April  6, 2017

“There are several conceptual issues, if one were to put on one’s hat as an economist. I think it undermines an honest credit culture, it impacts credit discipline... In other words, waivers engender moral hazard”

On international central bank swap lines

October 23, 2017, at the 32nd Annual G30 International Banking Seminar, Washington DC

“Inadequacy of the global financial safety nets and discriminatory central bank swap lines force EMs to self-insurance. ...I would go as far as describing the situation as a virtual ‘apartheid’ by which systemic central banks protect themselves

On banking regulatory powers

March 14, 2018

All commercial banks are regulated by the RBI under the Banking Regulation Act, 1949. According to Section 15 of the amended Act... the most common thread across omissions is the complete removal or emaciation of the RBI’s powers

On currency wars

August 1, 2018

“We have already had a few months of turbulence behind us and it looks like that this is likely to continue… The trade skirmishes evolved into tariff wars and now we are possibly at the beginning of currency wars”

On big reforms such as the MPC, the GST and the IBC

August 3, 2018

“These steps are unprecedented in the history of our nation in that they show the government’s commitment to sound public policy by establishing institutions and ceding power to them to perform vital functions”

Troubled times

The relationship between the RBI and the government has been strained for the past several months
 

Aug 8, 2018: The government appoints S Gurumurthy and cooperative banker and Swadeshi supporter Satish Marathe to the RBI’s central board as independent directors
 

Mid-Sep: The government cuts short the term of RBI central board member and banker Nachiket Mor, also associated with the Bill & Melinda Gates Foundation
 

Oct 10: The government reportedly invokes the never-before-used Section 7 of the RBI Act to force decisions it wants the RBI to take through three letters with over a dozen demands. The RBI replies to these letters a week later
 

Oct 23: The RBI holds a marathon board meet that lasts for around eight hours but remains inconclusive on most issues that government brought in
 

Oct 26: Deputy Governor Viral Acharya goes public to assert the RBI’s autonomy, warns of the wrath of the markets if it is not maintained
 

Oct 29: Another Deputy Governor N S Vishwanathan delivers a speech in Jamshedpur, making clear the RBI’s reluctance to bring down capital levels for banks
 

Oct 31: The government reiterates need for the RBI autonomy as “essential” but calls for better governance of the central bank

Nov 3: Economic affairs secretary S C Garg cites improvements in market indices, the rupee and crude to make light of Acharya’s “wrath of markets” remarks

Nov 9: Garg says discussions are on to fix an “appropriate economic capital framework for the RBI” and says the government does not want the RBI’s money.
 

Nov 15: RSS ideologue and central board member S Gurumurthy says standoff between the RBI and the government not a “happy thing”
 

Nov 17: Ahead of the RBI board meeting, Finance Minister Arun Jaitley says growth should not be throttled by squeezing liquidity to the needy sectors
 

Nov 19: A 10-hour RBI central board meeting decides to set up a panel on the economic capital framework for RBI and directs it give forbearances to small businesses
 

Dec 5: Governor Urjit Patel refuses to answer queries on frictions between RBI and the government, amid reports of truce between the two
 

Dec 10: Patel resigns, citing personal reasons