India appoints backer of Modi's demonetisation move as RBI head

By Suvashree Choudhury

MUMBAI (Reuters) - India on Tuesday appointed former finance ministry official Shaktikanta Das as head of the central bank, a day after Urjit Patel resigned from the post following a protracted spat with the government.

Das, who retired last year as secretary of the department of economic affairs, will have a three-year term as governor of the Reserve Bank of India (RBI), effective immediately.

Das was a key backer of Prime Minister Narendra Modi's controversial move in 2016 to scrap high-value currency notes, known as demonetisation.

"Bonds and rupee should react positively following this news," said Ashish Vaidya, executive director and head of trading at DBS Bank in Mumbai.

"He is a bureaucrat and will help in improving the RBI-government relationship. We expect the RBI to take a pragmatic approach under him, be pro-growth and change its stance going ahead given that inflation has come off sharply."

Patel resigned following weeks of tension over the government's demand for the central bank to allow some bad-debt-laden public sector banks to lend more easily. The government has also pushed the RBI to hand over some of its surplus reserves to help fund the fiscal deficit.

Das, 61, is a member of the federal finance commission, and one of India's G20 representatives. He had been widely seen as a contender for the top job at the RBI after the exit of former governor Raghuram Rajan in 2016.

He previously served on the central bank's board. Das came under fire for his pro-demonetisation stance and he was the most visible and vocal bureaucrat at the time Modi withdrew the high-value bank notes to fight tax evasion.

Last year, Das criticised the methodology of global rating agencies and sought a sovereign rating upgrade. Das has worked extensively in the budget division under both Modi's government and the previous coalition led by the main opposition Congress party.

While in the finance ministry, Das was involved in drafting India's Insolvency and Bankruptcy code, aimed at protecting small investors.

Foreign and domestic investors earlier said any openly political appointee with little macro-economic experience, would not sit well in equity, currency and debt markets that have already sold-off following setbacks suffered by Modi's Bharatiya Janata Party in state polls this week.

(Reporting by Suvashree Choudhry in MUMBAI and Krishna V Kurup in BENGALURU; Editing by Sai Sachin Ravikumar and Robin Pomeroy)