RBI governor exit fall out on money markets

TN Ashok

The face-off between Urjit Patel, RBI governor and Finance Minister ArunJaitley,  brewing since the last few months,  climaxed in the resignation of the former from the prestigious post, though reasons given for the move were “for personal reasons”. The two were at logger heads over the autonomous nature of the federal bank vs. the Finance Ministers superior claim over it as the apex institution and the thorny issue of transfer of surplus funds from the federal reserves to the government treasury to keep fiscal deficit under control – stoutly refused by Urjit and his deputy Viral Acharya, who also quit. .

As rapidly as Urjit resigned, Shaktikanta Das, former expenditure secretary, and low profile officer in the finance ministry once, quickly replaced Urjittold a press conference he would convene immediately a meeting of all the PSU bank chiefs to find out their problems and find measures to resolve them. The biggest problem facing all these banks is mounting NPAs that have crossed one trillion. 


Officially, Urjit’s resignation letter, summed up in just 88 words, cited personal reasons for the abrupt exit; off the record , people in the know claim that it is apparent that Patel was a victim of imbroglio and messy face off with the finance minister.


The immediate concern was the fallout of Patel’s departure, which came ahead of his tenure ending next September, on the financial markets, especially to the sentiments of foreign investors and rating agencies. While they might take a dim view of the resignation, the collapse of some non-banking financial companies (NBFCs) and the unprecedented bad loans crisis casts a dark shadow on the stability over the financial sector.


The markets nosedived  Monday as investors hedged their bets on the outcome of the poll results for five states due on Tuesday—especially since exit polls signalled  the incumbent Bharatiya Janata Party (BJP) is likely to lose in three key states. Even as markets are set to recover from the temporary shock , lets analyse why RBI quit and what are the issues of conflict between RBI and FM and whether the new governor Das will concede FM’s request for transfer of Rs 3 lakhs into the government kitty.


The last RBI-FM meet,   19th to be precise for the federal bank’s board meeting, seemed to pave the way for a better atmosphere for the latest endless coffee round talks between the governor and the FM and led to some kind of a temporary truce only. But the truce was short lived as Urjit quit soon after , which some observers say, was due to PM Modis intervention in the matter.

Urjits resignation came as a shock to the markets and govt officials because the tensions between the two apex financial bodies of the government seemed defused with both agreeing to settle for a middle ground at the end of a nine hour long board meeting a couple of weeks ago . Dipping into RBI’s financial reserves has been the most contentious issue between the finance ministry and the federal bank , with the former wanting some portion to reduce the fiscal deficit without taxation, and RBI unwilling to allow any one to touch its cache of monetary reserves kept as a rain cheque.

Its now history that The RBI conceded to constitute an expert committee on the Economic Capital Framework (ECF), but its mandate is restricted to future earnings only and not the existing reserves, those who were privy to the discussions in the board meeting and not willing to be identified claimed.“The board decided to constitute an expert committee to examine the ECF, the membership and terms of reference of which will be jointly determined by the Indian government and the RBI, the Central Bank said in a press statement issued soon after the meeting.

The main tensions between the RBI and FM began with reference to section 07 of the RBI act for consultations on critical issues. Section 07 seems to give unbridled powers to the finance ministry to issue directions to the RBI, the custodian of financial reserves and monetary policies and the caretaker of the Indian rupee in international banking circles and trade, which has been hotly contested by the RBI, with the Deputy Governor Viral Acharya, going viral on the issue in the media strongly backed by his boss Urjit Patel, the governor.

To find a way forward from the lockdown between the RBI and FM, the government wanted: And what the RBI decided: 1) Aligning capital norms of banks to Basel levels —- RBI said NO CHANGE to Basel levels: deadline was pushed by a year for the last tranche. 2) Relaxation of PCA framework on 11 PSU Banks – RBI said this would be examined by a department of the banks and gave no commitment on the spot  3) Easier credit for MSMEs – RBI said it would consider a debt recast for MSME borrowers with loans of uptoRs 25 crore 4)Special liquidity window for NBFCs – RBI said it commits itself to set up a committee to examine the Economic Capital Framework of RBI 5) Government wanted fixing issues of governance in RBI – a contentious point that seemed unresolved with no agreement.

Issues that remained unresolved were: Special liquidity window for NBFCs. Right from the UPA regimes time NBFC s functioning has been a thorn in the eye of the RBI as some of the NBFCs lured people with higher interest rates than banks, sometimes as high as 20% against 6% to 7% for term deposits of banks, and fled overnight with the cache of loot. RBI is extremely wary of such fly by night operators and so is the finance ministry but the latter is trying to find a solution amicable to both – the collector and the depositor.

The foreign media such as the leading Bloomberg, owned by the once New York mayor, sees issues in a different international perspective. Bloomberg says The Reserve Bank of India largely has itself to blame for the government’s interference in its independence. Bloomberg Economics sees merit in political demands for a lower capital reserve framework for the central bank. A limited surplus transfer from the RBI to the government could bring an amicable end to the feud.

T N Ashok is a Corporate Consultant, Resident Editor and Writer of Economic Affairs.

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