Hardly 'personal'; wholly 'institutional'

With Urjit Patel's sudden resignation, we may see the end of the era of the RBI's operational independence, and a resurgence of greater interference from the central government

Urjit Patel is the third. Sir Osborne Smith, the first governor of the Reserve Bank of India (RBI) who resigned before completing his term quit office in June 1937, having served for two years and 90 days of his three and a half year’s tenure. His reason was simple enough: The government’s views on exchange rates and monetary policy significantly differed from his. 

The second was Sir Benegal Rama Rau, ICS, the fourth RBI governor, who resigned in January 1957 after insurmountable differences between him and the finance minister, T T Krishnamachari (TTK), regarding the extent and terms of the central bank’s independence. Prime minister Jawaharlal Nehru backed TTK; which forced Rama Rau to put in his papers. 

Sixty-one years later, Mr Patel became the third casualty. By quitting with immediate effect from December 10, 2018, Mr Patel has chosen not to serve out the remaining nine months of his initial three-year term. Why has Mr Patel decided to leave so suddenly? And that too so close to the next RBI central board meeting scheduled for December 14, 2018?

Though his resignation letter says “for personal reasons”, those with inside knowledge of how things have been playing out between the RBI and the central government as well as between RBI’s senior management and at least one highly opinionated and newly minted central board member will privately admit that Patel’s reasons were not “personal” at all. There were many reasons for quitting, and each of these is institutional.

Illustration by Binay Sinha

Don’t believe the reportage of apparently amicable cordiality of the immediately previous RBI central board meeting that was held on November 19, 2018. By the afternoon of that day, everyone was praying that the meeting wouldn’t end with resignations of the governor and his chosen deputy, Viral Acharya. When that didn’t happen by the late evening, there was collective sense of relief, which led to the next day’s headlines suggesting that the differences had been harmoniously sorted out.

These weren’t. The meeting was long, arduous, extremely tough and hardly collegial. Historically unused to facing inflexibly tough demands of some key central board members — largely orchestrated by Subhash Chandra Garg and Rajiv Kumar from the Ministry of Finance (MoF) and S Gurumurthy of the Swadeshi Jagran Manch — the governor and his four deputies had to acquiesce more than ever before in the recent history of the RBI. To appreciate this, consider the positions that the RBI had taken before November 19 and what were apparently decided upon after the meeting.

The RBI went into the November 19 board meeting with strong positions on three key issues. These were:

1. Ability of the MoF to draw from RBI’s reserve funds. Since 2013-14, the RBI has transferred its entire annual surplus of income over expenditure to the central government — with the amount varying each year from Rs 658 billion to Rs 306.59 billion in the year of demonetisation. The government wanted much more from the RBI’s contingency funds, and the number most quoted was Rs 3.6 trillion. Pre-November 19, the RBI’s position on this was a strict “no-no”. After November 19, it conceded to setting up of an expert committee for fixing the central bank’s economic capital framework, whose members and terms of reference would be jointly decided by the government and the RBI. The writing on the wall was clear enough: Using the mechanics of an expert committee, a path would be opened to transfer large amounts of reserves and contingency funds from the RBI to the central government. Mr Patel and his management team had lost this key battle. 

2. The Prompt Corrective Action (PCA) framework, unveiled on 13 April 2018, which constrains the operations of 11 weak public sector banks and one private sector bank that are beset by bad loans. Pre-November 19, the RBI’s position was that the framework was sacrosanct and, for the future health of the banking system, absolutely no deviation would be entertained. Post-November 19, the RBI top brass agreed to the setting up of yet another committee to examine the issue of easing of the PCA framework, at least for some key government banks. The score: 2-0 in favour of the MoF. 

3. The RBI had set up risk weighted capital adequacy ratios that were stronger than the minimum Basel III standards. This was done in February 2018 to allow for early identification of stressed loan assets. Quite correctly, the central bank was inflexible about these. After November 19, while the RBI didn’t seem to budge in any substantial way, it conceded to extend the transition period by another year for full implementation of these capital conservation buffers. Not an outright defeat for the RBI, but a dilution significant enough to extract more latitude in the future. 

Thus, the November 19 meeting represented at least two-and-a-half major setbacks to the RBI. And the prognosis was that more pressure would be applied in the months ahead — either through committee recommendations or otherwise. The RBI had not witnessed such serious reversals in its positions for the last quarter of a century. It was clear to those who went beyond press reports that the MoF had won, and would press its advantages even more vigorously in the months ahead.

When you give up the beachhead to invading forces, you have lost the battle, if not the war. In effect, by the evening of November 19, the RBI was forced to give up the beachhead. Mr Patel realised this. So, before facing further institutional humiliation, he put in his papers. Being the governor who accommodated and managed demonetisation hadn’t saved his organisation from further onslaughts. And I suspect he expected more such assaults on December 14, 2018 and thereafter. Thus, his resignation. Whose cause is entirely institutional, and not personal.

Let me end on a sombre note. This is probably the end of an era of operational independence of the RBI. I used to believe that there was an aura within the RBI that invariably made its governors institution-preserving leaders such as Thomas à Becket, once he became the Archbishop of Canterbury. Sadly, I can’t foresee that any more. Hopefully, I’m wrong. Yet, as this government brings this great institution to its heels, I fear worse. 

The author is an economist and chairman of CERG Advisory Private Ltd