The exit of Urjit Patel as governor of the Reserve Bank of India (RBI) was the culmination of months of simmering tensions between the government and the central bank.
In a way, it gives the government the opportunity to do what it wants: name a new governor who is more willing to do its bidding; extract more capital from the central bank to plug its budget deficit; and loosen lending curbs on some of the weakest banks. As everyone awaits the appointment of the next chief, here's a look at what could be in store in coming days:
Scheduled for December 14, the RBI's board is unlikely to meet without a governor at the helm. A great deal is riding on that meeting since government-nominated members on the board had pushed to discuss tighter supervision of the RBI, and to set up committees to have oversight of various central bank's functions, from foreign exchange management to financial stability. Economic Secretary Subhash Chandra Garg, who is on the board, said last month he wanted to discuss changes to the central bank's governance structure and seek more interim dividends from the RBI. The central bank had viewed the pressure from government officials as an attack on its independence.
Viral Acharya, the deputy governor in charge of monetary policy, was Patel's messenger in the public showdown with the government. He gave a hard-hitting speech in late October, warning governments of a market backlash if central bank independence is undermined. Acharya's opposition to the government's interference in the RBI's role has led to speculation that he may be next in line to resign. A professor at New York University, Acharya's three-year term as deputy governor ends in January 2020.
Prime Minister Narendra Modi will have to appoint an interim governor, as has been the practice in the past, with that post likely to go to N. S. Vishwanathan, currently the longest-serving of the four deputies at the central bank. An interim appointee could be at the helm for several months before a permanent successor is named. There's no obvious candidate, but local media are floating names of several people, including Garg, and the top bureaucrat in the financial services division at the Finance Ministry, Rajiv Kumar, both of whom are RBI board members. Shaktikanta Das, a former economic affairs secretary and currently the government's representative at the Group of 20 summits, is also in the race, according to local reports.
A new governor, especially a bureaucrat, could turn out to be less hawkish than Patel, who headed the six-member monetary policy committee. In last week's policy meeting, the MPC left interest rates unchanged but opted to stick to a tight stance despite inflation undershooting forecasts. The RBI has also been reluctant to provide more liquidity to the banking system to support shadow lenders and some weak state-run banks, a key reason for the tension between the central bank and the government. Modi's administration wants the liquidity taps to be opened more generously so that banks can lend to small businesses ahead of a general election early next year.
Reserves and Banks
The new governor will have to grapple with pressure from the government to transfer more of its excess capital to the state, another key area of contention. Finance Ministry officials estimated the RBI has at least 3.6 lakh crore rupees more capital than it needs, which they say the central bank can use to help bolster weak state banks. At last month's marathon board meeting, a decision was reached to appoint a committee to study the central bank's capital framework. The new governor will also need to decide whether to remove lending restrictions on some state-run banks and deal with a liquidity crisis in the shadow banking sector.