Urjit Patel: Was he one of the weakest or finest RBI governors ever?

The reticent former central bank governor sought to put the institution ahead of personality, yet his cryptic resignation letter spoke volumes about the RBI-government relationship

Urjit Patel’s sudden resignation from the Reserve Bank of India (RBI) may have come as a shocker to most, but the market reacted far more soberly than many had expected.

The Assembly election results may have played a role, but at least part of the reason was that rumours of his resignation had been circulating for over a month. But both Patel and the government, the protagonists in this particular drama, deserve some credit for the subdued market response too. The quick appointment of a successor bottled up some of the fizz. And so did the fact that Patel chose to resign after market hours on December 10.

For Patel, at least, the relative low-drama resignation was of a piece with his outlook. As a firm believer in the institution being greater than any individual, he tried to make sure that it was the RBI that was in news, not the players in it, people close to him say.  Ironical, then, that he became the centre of a storm over the autonomy of the institution he headed.

During his two years and three months as the 24th governor of the central bank, he worked behind the scenes to fine-tune the institution, to make it more knowledge-based and dynamic, to work with clock-work precision and to stick to its guns once decisions had been taken. Uncertainty can be a potent tool in policymaking, but Patel did not appear to believe in that. His policy decisions were predictable, even though he was often perceived as being uncommunicative.

That same reticence meant that Patel rarely gave interviews or delivered public speeches. “You guys focus too much on the individual, and not on the institution,” he reportedly told a senior journalist who approached him for an interview. Yet it was the media that influenced his public image. Initially thought to be a “yes man” of the government, especially during the dark days of demonetisation when his voice was scarcely heard, his critics hailed him as a hero when he chose to resign.

In his characteristically terse resignation statement of less than 90 words, he offered no explanation for his decision. Perhaps he knew he did not need to. Relations between Raisina Hill and Mint Road had hit an all-time low in the months leading up to his exit and he may have sensed he would face the indignity of being overruled by legislative fiat. Whether he resigned in protest we can only conjecture. What is not conjecture is that he is the third outside appointee after Arvind Panagariya, vice chairman of NITI Aayog and Arvind Subramanian, chief economic advisor, to have left before their terms were completed (Patel’s would have ended in September 5, 2019). Patel’s predecessor, the more visible Raghuram Rajan, did not get an extension after his three-year term, though that, too, caused many raised eyebrows.

Though Patel was economical with his words, he had a penchant for plain-speaking. He was supported in this endeavour by Deputy Governor Viral Acharya. The year 2018 in particular saw Patel emerging from his silent avatar and speaking out against the constraints imposed by the government on RBI’s functioning.

The trigger for this was Rs 130 billion fraud perpetrated on banks by two celebrity jewellers. RBI was blamed by the government for not being able to spot it. Patel hit back, elaborating how the RBI was actually a paper tiger when it came to regulating public sector banks, whose real bosses were those in the government. He was frank in saying that RBI’s autonomy was compromised. No surprise, North Block did not take his comments lightly. Acharya’s forthright speech on the importance of central bank autonomy in late October, widely seen as an oblique criticism of the government, fanned the antagonism.

Patel’s refusal to budge on issues such as transferring central bank reserves to shore up the fisc or approving a special dispensation for bad debts in the power sector, despite the government’s repeated efforts, lost him friends in New Delhi. Patel’s RBI also snubbed them by not sending a representative for a Cabinet Committee meeting on power sector issues.

His stubborn refusal to give powerful business houses and defaulters leeway by easing borrowing terms made him deeply unpopular among Indian corporate promoters. To be fair, the government deserves credit for introducing tough legislation, such as the Insolvency and Bankruptcy Code (IBC). Patel took that initiative one step forward by allowing banks to mark a loan as default if payment is delayed even by a day. Once marked as default, the business was virtually up for sale.

This was a game-changer in the Indian banking landscape. According to senior bankers at the Business Standard’s annual banking forum, it is the fear of IBC, more than the IBC itself that is forcing companies to pay up. Recovery from bad assets doubled in 2018 over 2017, and many promoters are now eager to square off their dues or come to a settlement with banks on their loans. Patel, with the help of the government, turned the tables and made the meek bankers powerful.

He was the first RBI governor who did not have a sole say on monetary policy matters, but became part of a six-member monetary policy committee. As deputy governor, he was the architect of monetary policy framework, which suggested inflation targeting, instead of following multiple objectives. In internal RBI administration also, the governor tried to make the organisation more skill-based by introducing a scheme for officers that denied promotion to the bottom 25 per cent. Obviously, this decision didn’t make him popular among central bank staffers. However, Patel did introduce a medical scheme for employees, both present and retirees, which earned him praise.

Many say Patel’s inflexibility was unnecessary, and that the public display of rivalry between the government and the central bank undermined RBI’s prestige. Part of the later criticism stemmed from his ambiguous role during demonetisation. He neither tried to justify this draconian, nor did he seek to distance himself from it. Then economic affairs secretary Shaktikanta Das, who has ironically been designated his successor, was the chief spokesman for the move. This may have suited Patel and the RBI, given the umpteen circulars the central bank was forced to issue modifying demonetisation rules over 53 days.

Despite the confusion, the cash situation returned to near normalcy by March. Considering that more than Rs 15 trillion – 86 per cent of the currency in circulation — was rendered useless overnight, that was no mean feat. It is now quite clear that the central bank did not get enough notice that demonetisation was a possibility from the hurried manner in which higher denomination notes were printed. 

When he took office, many considered Patel one of the weakest governors to hold the post, and his taciturn style earned him  detractors, both outside and within the central bank. His dignified exit, the first by an RBI governor in post-liberalisation India, appears to have salvaged his reputation with his critics. Several others, however, consider him one of the finest RBI governors ever. Given his polarising personality during his stint at Mint Road, history would probably be his best judge.