Market sentiment may take a hit again if Urjit Patel resigns, say analysts

The ongoing spat between the government and the Reserve Bank of India (RBI), if not contained, will have dire consequences on the markets, feel Dalal Street experts. At this crucial juncture, when markets have started recovering after NBFC turmoil and supportive global cues, the resignation of the RBI Governor Urjit Patel will rattle investor sentiment, they say. 

The rift between the RBI and the government turned ugly after RBI Deputy Governor Viral Acharya last week went public saying undermining a central bank's independence could be "potentially catastrophic. Government officials have recently called for the RBI to relax its lending restrictions on some banks, and the government has also been trying to trim the RBI's regulatory powers by setting up a new regulator for the country's payments system, said a Reuters report dated October 27, 2018. 

The tussle widened further with reports circulating on Wednesday that the governor Urjit Patel has conveyed his displeasure to the government and he is considering all options including to step down, TV channels reported, citing sources.

"In case it really happens, there will be mayhem in the market because at this point of time we can't afford RBI Governor resigning. Sentiments are already weak in the market. Also, RBI is an independent body, so if Patel resigns, it will be a big negative for the markets," said independent market expert Ambareesh Baliga. 

Finance Minister Arun Jaitley has, however, blamed the RBI for failing to stop a lending spree between 2008-2014 that left banks with huge bad debts, inflaming a row that recently erupted between the government and the central bank.

Also, the government has invoked never-before-used powers under the RBI Act (Section 7) allowing it to issue directions to the central bank governor on matters of public interest, the Economic Times reported on Wednesday. The Economic Affairs Secretary on Wednesday, however, refused to comment anything with respect to it.

Section 7 (1) of RBI Act states that the Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.

Sudip Bandyopadhyay, Group Chairman at Inditrade Capital terms the overall development as an unfortunate incident. "In any crisis, which we have witnessed previously, the government and RBI have worked in tandem, they have worked together to contain it. This is the first time we are witnessing they are at loggerheads over how to handle the crisis which is unfortunate for the markets and resignation of the governor of the Reserve Bank of India, definitely, doesn't augur well for the mood and sentiment of the market," Bandyopadhyay opined.   

Arun Kejriwal, Head of Kejriwal Research agrees. "Any such incidents happening is certainly not good because it shows there is a lot of friction. I am sure in the interest of RBI as well as the government, one won't think to go things to that extent that he resigns," Kejriwal added.