- Mr Patel's resignation comes after a long drawn feud with government
- He assumed charge as the 24th RBI governor in September 2016
- His resignation comes 10 months before his term was supposed to end
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The stunning exit comes four days before an RBI meeting to discuss what is called a "Governor's report" on the status of subjects raised by government nominees at a meeting last month.
The resignation, though widely anticipated amid the escalating feud, was "surprising", said RBI central board member S Gurumurthy, a representative of the government on the RBI board. "The previous meeting was held in such cordial atmosphere it comes as a shock," said Mr Gurumurthy.
Urjit Patel's predecessor and former boss Raghuram Rajan said: "All Indians should be concerned about the resignation."
The government has been putting pressure on the RBI to ease its regulatory curbs on some banks, infuse more liquidity and relax capital norms as it faces a slowing economy ahead of general elections due by May.
In the last meeting, the RBI had agreed to set up a panel on sharing surplus reserves and restructure loans of small businesses up to Rs 25 crore. This meeting, which had brought Mr Patel face-to-face with some of government nominees on the RBI Board, was supposed to have ended on a conciliatory note.
However, various reports had said that the tensions between the RBI and the government were likely to re-surface during Friday's meeting. News agency Reuters reported, citing sources, that on Friday, a majority of the 18-member RBI board intended to press for reduced curbs on lending and governance changes that would have given the board more say.
The RBI board is an advisory body that guides the regulator, leaving decision-making to the governor and his colleagues. But news agency Bloomberg had reported that the government is proposing changes that will enable closer supervision of the central bank.
Mr Patel's resignation was predicted by many opposition leaders as the government reportedly pulled out the hardly-used Section 7 of the RBI Act, which gives it special powers to direct the central bank in the name of public interest.
The friction between the government and the RBI exploded in November, when Deputy Governor Viral Acharya, giving an example of the Argentinian government's interference in the central bank, had said that undermining a central bank's independence could be "potentially catastrophic".
Finance Minister Arun Jaitley said, "The government acknowledges with deep sense of appreciation the services rendered by Dr. Urjit Patel to this country both in his capacity as the Governor and the Deputy Governor of The RBI. It was a pleasure for me to deal with him and benefit from his scholarship."