Reserve Bank of India Governor Urjit Patel has recently resigned from his esteemed post, making him only the first governor since 1990 to step down before the termination of his term. Patel’s three-year term was supposed to end in September 2019.
In his official resignation, he cited personal reasons for his decision of resigning as the RBI governor. He also stated that it had been his privilege and honour to serve in the Reserve Bank of India in various capacities over the years. His decision to step down was immediately effective, and Shakti kanta Das was roped in as the RBI governor. He extended his gratitude to the RBI staff, officers and management for lending support to him in accomplishing various achievements in recent years. The official press release marks him saying “I take this opportunity to express gratitude to my colleagues and Directors of the RBI Central Board, and wish them all the best for the future.”
There were several conjectures regarding Patel’s exit post the differences between the RBI and the government poured out in public. The first happened when RBI Deputy Governor Viral Acharya was compelled to voice out his views regarding the intervention of the government in the functioning of the central bank. Through his speech, he demanded the independence in running a central bank properly. The speech was delivered with the backing of Patel, suggested in the footnotes.
The speech was made in response to a letter sent by the government seeking consultations under a rare provision of the RBI Act.
Under Section 7 of the Act, the government can direct the central banking institution if necessary, for public interest in consultations with the governor.
What Provoked the RBI Governor to Resign?
There have been several argumentative issues that emerged between the RBI and the government.
One of the primary reasons among them is the government’s demand that the RBI disburses more dividend from its reserves.There have been repeated suggestions for either increasing the dividend or reducing the capital on the central bank’s balance sheet. Such a decision was opposed by the current and former RBI officials.
Former RBI Deputy Governor Rakesh Mohan Acharya have given references for research from various academics and writings where it was explicitly mentioned that having adequate reserves and capital is essential for maintaining confidence in the central bank. Since sufficient currency reserves combat the losses that can be incurred from central bank operations and having appropriate rules in place is necessary for the allocation of profits is considered an important part of central bank’s independence from the government
Earlier this November, government officials on the RBI’s board enforced a relaxation of the prompt corrective action framework being used to heal the weakening condition of the poor banks. Eleven paralysed government banks are under the framework, and the RBI has repeatedly focused on explaining the prime requirement for such a framework.
The government was pressurising the RBI to ease the framework, and it prompted Acharya to echo the need for greater RBI control over government-owned banks-something that was already expressed by Governor Patel earlier this year.
The conflict between the RBI and the government was further fuelled by the suggestion to set up a payments regulator beyond the confines of the RBI. Recently, the RBI publicly expressed its strife on the government’s proposal to set up a Payments Regulatory Board.
Patel’s relationship with the government experienced a jagged beginning. Just within some days of Urjit Patel chairing the governor’s role, the government enforced demonetisation, which led to the withdrawal of 86 per cent of the country’s currency in circulation. The decision was strongly opposed by Patel’s predecessor Raghuram Rajan.
Patel remained numb through the hassles of demonetisation and remonetisation. There was a report that suggested that theRBI wanted to defer the decision of demonetization since they wanted to wait till the time a larger stock of new currency notes gets printed.
The RBI had made “significant observation” on some of the justifications given by the government for its demonetisation decision.
As the demonetisation experiment had a critical acceptance among the public of the nation, the taciturn Patel provided importance to banks and resorted to stringent steps against both public and private banks. This has led to increased altercations with the government.
The prime objective of Patel was to initiate reforms for both public and private sector banks. He was seemed extremely harsh on private banks that acted as laggards in meeting governance and compliance standards set by the RBI. Two private bank chief executives –Shikha Sharma and Rana Kapoor – were denied a term extension and the ex-ICICI chief Chanda Kochhar – has stepped down due to allegations of impudence.
Patel’s exit has signalled that the central bank has now experienced transitions in a span of 3 years. His predecessorRaghuram Rajan opted for an exit at the end of his three-year term but had clearly reciprocated his decision for leaving even before the government could come to a final conclusion. Patel exits with a few months to spare in his current three-year term. Former governors D Subbarao and YV Reddy both spent five years each at the helm of the central bank.