The Resignation of Urjit Patel from RBI - Seeker's Thoughts

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Tuesday, 11 December 2018

The Resignation of Urjit Patel from RBI

The governor of RBI, Urjit Patel has resigned, which is not going to leave the positive impact on the market. The reasons he mentioned were personal, however, there have been a long tussle between RBI and the Indian government.
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RBI- What is it?
RBI stands for Reserve Bank of India. RBI regulates the issue of Bank notes and keeping 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. It is to have a modern monetary policy framework to meet the challenges of an increasingly complex economy. It has to maintain price stability while keeping the objective of growth.
Urjit Patel: Beginning to Resignation- did he resign for personal reasons?
Urjit Patel has succeeded the ‘rock star’ and ‘vocal’ governor Dr Raghuram Rajan. Urjit Patel when joined as governor was considered as ‘government’s man’ while later on he advocated the ‘autonomy and independence of the central bank..
The First Governor to resign since 1990
This comes as a shock that governor has resigned nine month before the term. He studied in London School of Economics, Oxford and Yale University. He was a Kenyan national until 2013. Just before being appointed as a deputy governor of the RBI in January, he acquired the Indian Citizen RBI.
Understanding the conflict between Government and RBI
Tempering with the power of RBI
There have been various problems like rising NPA, and Demonetization etc, and for that RBI was blamed. On the other side, the RBI is the sole regulator of the banks but still it feels that it does not have enough power over banks and decision making is compromised. The regulator has scrapped all the past restructuring mechanism and tightened the norms. Delay in paying loans now can lead to the Insolvency Court and attract punitive measures.
RBI refused to provide special dispensation to help NBFCs
The RBI has issues PCA or Prompt Corrective Action Framework – which restricts weak banks from lending and this contribute to liquidity crisis as government accuses the RBI. Government also wanted special dispensation by the RBI to help non-banking finance companies (NBFCs) apart from relaxed norms for lending to micro, small and medium enterprises.
Conflict over interest rates
Interest rates have been the reason of conflict as well, the government wanted reduced interest rates when oil prices were low, and inflation was not a dominant concern either. However the Monetary Policy Committee has not reduced the interest rates.
Section 7 of Reserve Bank of India Act 1934
The finance ministry initiated a discussion under the ‘never – used- before’ section 7 of the RBI act 1934. The section empowers the government to issue direction to RBI.
RBI’s deputy governor Viral Acharya in October 2018 talked about the independence of the central bank. He kept the point that any compromise with the autonomy of the RBI could be potentially catastrophic for the already struggling economy.
Effects of the conflict
This is a matter of concern while there are so many internal concerns as well as external concerns like trade sanctions, hyper protectionisms, rising oil prices and these two Government and RBI are fighting with each other.
Conclusion
RBI is in right place when it placed weak banks under PCA, and it has helped in controlling the problem of bad loans as RBI said. The government PCA diluted as it wants bank lending to rise, and it will reduce liquidity crisis. NBFCs, Housing Finance Companies and Micro Finance institutions suffered due to non- liquidity.
Therefore, instead of fighting with one another there could be other ways to ease liquidity as addition to the routine Open Market Operations. ship.