Patel’s exit as RBI governor roils Indian markets

Bloomberg

Urjit Patel’s shock exit as governor of the Reserve Bank of India has roiled financial markets. The rupee dropped as much as 1.6 percent against the dollar in early trading on Tuesday, reacting to Patel’s decision to quit nine months before the end of his three-year term for “personal reasons.”
Patel’s RBI had been at loggerheads with the government for weeks, fending off pressure to ease lending restrictions and transfer more of its excess capital to the state. A board meeting had been scheduled for Friday, at which government representatives were expected to seek changes to the central bank’s governance structure. It’s unclear if the board meeting will still proceed this week.
Patel’s departure adds another layer of risk to an economy facing multiple 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.
Meanwhile, India has named a former bureaucrat who oversaw Prime Minister Narendra Modi’s controversial cash ban program as its new central bank governor, a day after Urjit Patel abruptly quit following disagreements with the government.
Shaktikanta Das, 63, who often sought a cut in interest rates during his time at the Finance Ministry, was appointed for a three-year tenure, according to a statement on Tuesday from the Personnel Ministry. He will be the 25th governor of the 83-year-old monetary authority.
A former economic affairs secretary from 2015 to 2017, Das worked closely with the central bank and oversaw Modi’s plan to ban high value notes in late 2016, an exercise that hurt the economy and led to thousands of job losses.
The tension between the RBI and the government was laid bare in an October speech
by Deputy Governor Viral Acharya, who defended the central bank’s independence and warned of a market backlash should it be undermined.
Patel, who succeeded Raghuram Rajan in September 2016, 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.
Investor confidence in Indian assets had only recently bounced back, helped by a slide in oil prices and a dovish tone from the Federal Reserve. November saw the best rupee gains in nearly seven years, while local stocks saw their best month since July.
Oxford-trained Patel, who shunned the public spotlight as governor, was initially seen as a Modi 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 engi-nes firing ahead of a general election next year.
The Indian central bank 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 US President Donald Trump, while counterparts in the UK have also been pressured by policy makers.
“Short-term political gain but with potentially incalculable long-term damage to the commitment to credible economic policy” Vivek Dehejia, an associate professor of economics at Carleton University in Ottawa, said on Twitter.