The Big Exit

“Personal Reasons” is what the now former RBI governor Urjit Patel cited while resigning on 10 December 2018, about nine months before his expected tenure completion. It is not a secret that his tenure was not a smooth sailing boat but a rocky path with regular clashes with the incumbent government. And it is also a no-brainer that while the ex-governor cited personal reasons, the bumpy ride and the recurring intrusion is exactly what led him to resign.

A speech by Viral Acharya, Deputy Governor that he gave a couple of months ago hinted at just that, “Governments that do not respect central bank’s independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.”

While Mr Patel has resigned and is only the third governor to do so in independent India, but in his tenure he has seen everything from demonetization, NPAs, banking scams as well as Non-Banking ones and of course the election year bought with it its own share of tantrums. It won’t be fair to say that he had his share of ups & downs because as it seems, the downs far outweighed the ups.

The Exit was the cherry on the top that the Banking sector awaited to end the year after witnessing a series of major exits & unprecedented controversies. Chanda Kochhar and ICICI Bank, Shikha Sharma and Axis Bank, Rana Kapoor and Yes Bank just to name a few. Before Mr Patel, Benegal Rama Rau was also one of the Governors to resign mid-term six decades ago due to reasons similar to Mr Patel.

But the exit was not a result of recent conflicts; it was Building and brewing since the PNB scam came into light and maybe even before that. But the PNB Scam was the first significant event when the Independence and autonomy of the Central Bank came under fire. It was then that under whose purview does the accountability of the national banks fell came under dispute with both the central bank and the government pointing fingers at each other. After that it was just a series of unfortunate events.

The downfall of the Infrastructure Leasing and Financial services was another nail in the coffin. Other issues included easing rules of lending under the PCA framework with the government wanting to decrease the pressure on SMEs but the RBI being cautious about the unrequired need for cleanups it would later create. Additionally, NPAs and their classification and creation of a separate payments regulator were other points of contention.

As the pressure of the upcoming elections mounted on the incumbent government because of the resultant liquidity crunch the nation faced, the central bank simultaneously faced mounting pressures to ease it out.

However, these ordinary pressures and pushes seldom bore fruit when it came to the RBI who rarely had the tendency to cater to the whims and fancies of the government with its own long term agenda of maintaining the inflation and a stable monetary policy coming to the fore. And that is exactly when the government decided to take out the Big Gun in the form of Section 7. A section which in the history of the RBI has never been invoked was called out by the government which empowered it to Direct the RBI on matters of “Public Interest”.

Which poses very imperative questions such as, Was the situation so urgent? Or was it just a show of power? And why exactly does this look like a repeat of what so many Indian institutions currently are fighting for which is autonomy and freedom from its very own government? 

India had faced numerous instances of financial instabilities before as well but never was an extreme step like invoking section 7 was deemed necessary, which brings another pertinent question to the fore and that is who decides what is “Public Interest” in matters of economic stability because that is exactly what the purpose of RBI is.

The Preamble of the RBI reads, “To regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.”

There is no dispute over whether or not the government has the best interest of the public in mind, but the application and the intent were lost along the way when its own vested interest became more important. As the speech by the deputy governor indicated that the government looksfor the short term whereas the RBI maintains its position with a vision ofthe long term.

The appointment of Shantikanta Das, who previously held position of the Union Economic affairs secretary and was also actively involved during the demonetization phase may not seem like the most obvious choice with his history of no economics however he might just be the right choice especially with the government’s history of hiring allies as aides in the top most Public institutions.The only thing that is left to be seen is whether this will be a temporary Blow or will it leave one of the most prestigious and premium institutions of the country handicapped.

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