Here's what could have led to RBI Governor Urjit Patel's exit

The sudden resignation of Reserve Bank of India Governor Urjit Patel comes after the rumours of his resignation had died down and it seemed all was well between the government and the RBI. The November 19 board meeting of the RBI was expected to be a showdown between the government and the RBI who did not see eye to eye on a range of issues related to liquidity, credit flow and the controls governing weak banks. But the meeting passed without any storm and it was thought both the parties were finally working together.

Speaking at the customary post-policy presser after the fifth bi-monthly policy review on December 5, wherein the policy rates were left unchanged, Patel parried questions on his spat with the government. His decision to keep the repo rate unchanged was also seen as a conciliatory move.

Though Patel has cited personal reasons for quitting the RBI, given the recent controversies, it's not unreasonable to assume that Patel quit when the RBI autonomy faced pressures from the government.


What were the contentious issues?
Though the government had denied it several times, it was speculated that it wanted more money from the RBI reserves to help fund the fiscal deficit but the RBI had not obliged, sticking to its argument of preserving long-term financial stability.

The government wanted the RBI to relax the prompt corrective action (PCA) framework under which as many as 11 public sector banks are placed now due to enormous stressed assets. The government says the stringent norms hurt credit growth.

The government had sought a special refinance window for mutual funds, NBFCs and housing finance companies; a facility for banks to raise $30 billion overseas; a relaxation in the limits on corporate bonds for foreign portfolio investors; and easier mandatory hedging requirements for infrastructure loans of less than 10 years. In the interest of long-term financial health of the country, the RBI does not want to ease controls to help government achieve short-term goals of economic growth.

The overactive board
The RBI board had played an overactive role in the spat between the RBI and the government, pushing the government's viewpoint. There was no clarity on whether the board could dictate terms to the RBI. The government was seen to be putting pressure on the RBI governor through its handpicked nominees. RSS ideologue and board member S Gurumurthy had written to the RBI governor complaining against deputy governor Acharya’s October 26 speech that warned about the dangers of undermining the autonomy of regulators. “The RBI Act itself says the management of RBI is entrusted to the board, with the governor and the deputies being mandated to exercise management powers subject to board’s directions,” Gurumurthy had said.

The sword of Section 7
The RBI is an entity independent of the government as it takes its own decisions. However, in certain instances, it has to listen to the government. This provision in the RBI Act is contained in its Section 7. The section empowers the government to issue directions in public interest to the central bank, which otherwise does not take orders from the government. When RBI under Patel stood its ground against the demands of the government, it was reported that the government could use its powers under Section 7 to override Patel.

During the RBI-government logjam, Patel had two options, either to accede to the demands of the government or resign because Patel could resist the government only to a point due to the government's powers under Section 7. It was thought that if Patel did not agree with the government and the government invoked Section 7, he might choose to quit. But it seemed both the parties had buried the hatchet even though a few thorny issues, especially the one regarding the RBI reserves, was far from being resolved. Now it looks Patel did not agree with the government but knew he could not stand his ground for long. Perhaps he was trying to talk to the government to find a way out but resigned when he failed.