Unfortunate exit

Urjit Patel’s abrupt resignation as Reserve Bank Governor only affirms a growing view that the Centre is unable to strike the right balance between autonomy and oversight. Differences between the Centre and the RBI have been the norm rather than the exception, and are, in fact, compatible with institutional autonomy. But this time, some limit appears to have been breached. For this, the Centre must shoulder most of the blame. The RBI has been regarded the world over as a competent monetary authority — a reputation well earned for its handling of the Global Financial Crisis and before that, the East Asian Crisis. Patel’s exit cannot do the central bank’s stature and image much good and will shake the confidence of foreign investors. Seen along with the fracas over the new GDP numbers, which raises questions about the autonomy of India’s premier data agency, it would seem that India is staring at an institutional crisis. This slide must be arrested. There can be no better place to start than the RBI. The RBI board meeting, scheduled for this Friday, must signal an end to the acrimony.

Patel’s resignation does not come as a bolt from the blue. The rift seemed to set in after the ‘February circular’, which withdrew all old loan restructuring schemes and effectively nudged banks to move all the unresolved cases under the IBC. The Centre, possibly apprehensive after the impact of demonetisation on small industries, wanted the RBI to loosen lending norms for the 11 weak banks placed under the ‘Prompt Corrective Action’ framework; it argued that Basel III-plus norms were not applicable in the Indian context. It challenged the February circular in court, an inexplicable and extreme step — never perhaps had the RBI and the Centre ever locked horns this way. Finally, anxious that it was about to breach its fiscal deficit limit, it sought to argue that the RBI was sitting on excessive reserves. A deceptive truce of sorts was arrived at during the November 19 board meeting, where committees were set up to defuse the tension (see our editorial of November 20). But the biggest irritant of all, it appears, was the presence of openly critical, ‘political’ government appointees on the RBI board, who seemed bent on pushing the RBI top brass into a corner. While the RBI board is dominated by government and industry nominees, they cannot afford to disregard the central bank’s autonomy. The balance of power between the RBI management and the board has been ruptured.

Ironically, some of these assertive board members were also votaries of demonetisation, which flattened small industry. Patel did not cover himself with glory at that time; he disappeared from the scene and allowed the Finance Ministry to decide unilaterally on currency management, an area that ought to be the RBI’s domain. Patel may have overcompensated for his silence by taking a stubborn view on credit norms. But surely all of this could have been sorted out across the table. We need more sobriety at the highest levels.

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