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Patel's RBI exit adds to investor nervousness ahead of Lok Sabha polls 2019

The loss of Patel adds another layer of risk to monetary policy amid economic threats both foreign and domestic

Anirban Nag I Bloomberg 

Urjit Patel

Urjit Patel’s shock exit as governor of the dealt investors another bout of monetary policy uncertainty when they were already bracing for an electoral test of Narendra

Patel, who was nine months from the end of his three-year term as governor, roiled financial and surprised the government by quitting on Monday, citing “personal reasons.”

He did so ahead of a board meeting on Friday, at which government representatives are expected to push the RBI to do more to ease a cash crunch and hand over more of its excess capital. State election results due Tuesday were already adding to investors’ nervousness before a national election next year.

The loss of Patel adds another layer of risk to monetary policy amid economic threats both foreign and domestic. The rupee is among the worst performers in Asia this year, the economy is weakening and the banking sector is in crisis.

“Short-term political gain but with potentially incalculable long-term damage to the commitment to credible economic policy” is how Vivek Dehejia, an associate professor of economics at Carleton University in Ottawa, described on Twitter the consequence of Patel’s exit. It “is a very tragic day for India and for sound economics.”

Rupee forward contracts and futures on the Nifty 50 stocks index fell on of Patel’s resignation, which came after the close of regular trading in Mumbai on Monday. Stocks and bonds are likely to extend the declines Tuesday.

Patel, who succeeded Raghuram Rajan in September 2016, has been at loggerheads with the finance ministry, which wants the RBI to ease lending restrictions on some banks and has opposed higher interest rates in the past. The differences were thrown into the open when used an October speech to defend the central bank’s independence and warned of a market backlash should it be undermined.

Patel has tried to burnish the RBI’s credentials as an inflation-fighting central bank. After hiking interest rates twice this year, the RBI left rates unchanged last week, while giving itself room to move again by sticking to its “calibrated tightening” stance.

The exit of Patel may lead to a less hawkish bias at the RBI and could mean a rate cut returning to the agenda as soon as February, said Abhishek Gupta at Bloomberg Economics in Mumbai.

Investors will hope for a credible successor who’ll bring continuity, said economists at Citigroup Inc. They noted that nine of the bank’s governors since 1970 have had previous experience in institutions such as the International Monetary Fund, and pointed out that it took more than two months to replace Rajan.

Oxford-trained Patel, who has shunned the public spotlight as governor, was initially seen as a ally after he appeared to back the prime minister’s controversial ban on high-value currency notes in November 2016, which hurt the economy and led to thousands of job losses. Since then, he has battled to get India’s struggling banking system in order and punish errant borrowers who have stopped servicing their debt even though they have the ability to pay.

Patel tightened rules on weak state-run banks earlier this year, restricting their ability to lend. The government wants the RBI to relax the rules so banks can lend more easily and keep the economic engines firing ahead of a general election next year. It also wants the central bank to hand over more of its excess capital.

The is not alone in facing political heat, with challenges to the independence of monetary policy makers a theme of 2018. The Federal Reserve has weathered criticism from U.S. President Donald Trump, while counterparts in Turkey and the U.K. have also been pressured by policy makers.

“Looking back, this doesn’t surprise me,” said R. Gandhi, a former of the RBI. “The differences between the RBI and the government were public, and this will be seen as a fallout of that.”

First Published: Tue, December 11 2018. 07:52 IST