Why Urjit Patel may not resign despite rift with Modi and Co.

If Urjit Patel would have resigned, the confidence of foreign investors in the Indian Economy would take a serious hit.

The shake-up in India’s apex financial institution RBI and the Modi government came to a defining turn on Wednesday as the reports expressing the possibility of RBI governor Urjit Patel stepping down started doing rounds. CNBC TV18 first reported that the RBI governor may consider resigning from the post as the split between the central bank and ruling Modi government became more apparent in the recent days.

The government and the RBI came to loggerheads after the deputy governor Viral Acharya hinted in a speech on Friday that the government is trying to hinder the independent working of the institution. Stressing on the importance of autonomy of the RBI, Acharya warned that undermining a central bank’s independence could be “potentially catastrophic”. His warning came amidst the reports that government is pressurising RBI to relax its policies and trying to reduce its powers.

In a speech to top industrialists, he even cited Argentina’s 2010 economic crisis as an example. Acharya recalled Argentine government’s meddling in its central bank’s affairs led to a surge in bond yields which in turn hurt the South American economy. Reportedly, the government officials were hurt that Viral Acharya chose to talk about the rift between the government and the central bank in public. Many also believe that the RBI governor Urjit Patel too, shares the same views as that of Acharya.

The spat became more public on Tuesday when Finance Minister Arun Jaitley blamed the institution for “lending spree” during UPA era. While speaking at an event in New Delhi, Jaitley said, “The central bank looked the other way when banks gave loans indiscriminately from 2008 to 2014.”

According to a CNBC TV18 report, a source said that there is an “irreversible breakdown between RBI governor and the government”. However, by afternoon the doubts surrounding Patel’s resignation were put to rest. RBI governor called for a board meeting on November 19 clearly indicating that there is no resignation on cards as of now. The Finance Ministry too issued an official statement for the first time to clear the air. “The autonomy of the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this,” the statement read.

Though the full-blown confrontation between the government and RBI has deferred, for now, it doesn’t mean that the differences between the two have been buried. Moreover, it certainly doesn’t indicate that all is well with RBI and government. However, there are many reasons why despite the strong disagreement with Modi government, Urjit Patel has chosen to stay or as it seems.

#GovtVsRBI | Rift between RBI & govt widens after Oct 30's FSDC meeting.

All options on the table, @RBI sources tells @CNBCTV18News @ShereenBhan @latha_venkatesh pic.twitter.com/WErlYLBgWu

— CNBC-TV18 (@CNBCTV18Live) October 31, 2018

The economic crisis India is witnessing is becoming more and more apparent though, the government has been reluctant in accepting that there is a crisis in the first place. In such a scenario, a war of words playing out between the Finance Minister and Deputy Governor of the Central bank indeed sends a wrong signal. If Patel resigns now, the confidence of foreign investors in the Indian Economy will take a serious hit. Though it may not lead to drastic impact such as investors pulling out of India, however, it does give a bad impression and raises the question on the credibility of the institution.

On the other hand, for Urjit Patel quitting now is like leaving the ship to sink. As HW Business and Finance Editor Akhilesh Bhargava points out, “A commander will not leave the battle even if he is going to retire the next day. The situation for Urjit Patel is somewhat similar. If he quits amid the government-RBI standoff, it will adversely impact the stock market, the rupee will weaken and interest rates will soar.” For any banking professional economic crisis credited to him/ her is bound to bring minus marks on the report card. Urjit Patel certainly would not want that especially in the last leg of his tenure as 24^th RBI governor.

While Patel avoided the disaster by not resigning, the government has a lot of answering to do. Why did Finance Minister belittle RBI- the apex financial institute of the country at an event that was attended majorly by the foreign audience? Though it was Viral Acharya who had publicly given a hint about RBI’s rift with the government, Finance minister could have found out a better way to handling the dispute. His statement only further fuelled the fire instead of dousing it.

Secondly, it also raises questions on the policy decisions taken by the Finance Minister and the Prime Minister. Earlier, former RBI governor Raghuram Rajan was said to have differences with the Modi government over a policy matter. Same was the case with Arvind Pangaria, first NITI Aayog VC and Arvind Subramanium, Chief Economic Advisor. Both of them stepped down before their tenure came to completion. Though the government said both of them left due to personal reasons, the pattern certainly cannot be ignored. The economic experts deserting the Modi government begs an important question of whether or not the Modi govt’s policies are flawed?

While it casts a shadow on the functioning of Finance Minister, the RBI crisis affects PM Modi the most. The CBI vs CBI and later the CBI vs government fight was not enough already, the Modi government is hit with another institutional crisis. PM Modi’s image as a leader in control has seriously been dented due to this. The two crisis have rather placed Modi as a leader with no control while the apex institutions are either dealing with infighting or are in a stand-off with his own government.

As of now, Urjit Patel’s decision of not quitting the post has avoided the catastrophe. Will the government be able to find a way to successfully deal with the RBI crisis or will it prove to be a calm before the storm? All eyes are now on the November 19 RBI board meeting.