The resignation of any governor of a central bank makes headlines and hence the exit of Urjit Patel is significant. This is definitely not the first time in India as there have been instances in the past too with the last one being of R N Malhotra around three decades back. Patel has made a statement that he has resigned on personal grounds and should be taken at face value. Any speculation beyond what has been stated would be highly improper and hence it should left at what has been said.
The surprise element is, however, noteworthy because all the issues that had divergent views between the government and the Reserve Bank of India (RBI) were addressed in the last Board meeting of the RBI with the conclusion being that separate committees would be set up to look into issues like the transfer of reserves from the RBI to the government.
Therefore, for all practical purposes, it was work in progress. The fact that in the recent policy the development agenda included a point on SME finance sort of closed all the issues in terms of laying down a roadmap that was agreeable to all. Therefore, the move does come out of the blue and a major surprise.
The resignation comes just after the credit policy was announced last week and before the Board meeting this week which gives the government time to appoint a new Governor.
How will the market react? The answer is that it will be negative to begin with until there is clarity on the new governor and his policies. The resignation will be interpreted in a differential manner by different players on the course of future banking reforms and other policies that can cause considerable upheaval in the market. This will affect the stock market, bank stocks, companies under NCLT, bond prices, exchange rate and interest rates. However, this may be considered to be more transient in nature as there will be a correction in the next few sessions and definitely next week after the RBI Board meeting ends.
Who will be the new Governor? Several options exist and while it could be one of the existing deputy governors it could also be someone from outside. Even an external governor will be interesting, which seems more likely. The governor can be from the academic world as has been the case with the Chief Economic Advisor (CEA) who has been recently appointed or a bureaucrat.
It is more likely that it will be someone who has been with the government as the person would also know the way the system works and will be better able to respond to issues where there are divergent views. The last two governors were more academically inclined and would tend to see things differently which added a breath of fresh air. However, this time there could be a change in approach in getting in an expert from the Ministry. Also, the preference on the earlier two occasions was for one who had global experience and it will be interesting again to see if the choice is in this direction.
Will the overall approach change? This is critical and there are two major areas that need attention. The first is monetary policy where it can be assumed that it will be business as usual as the decisions are taken by a Committee and not an individual. Hence there should be no change in the conduct of this critical policy every two months. This is a positive for the market and hence any doubt on this front should be kept aside.
The other is the overall conduct of central banking. Here, it would be interesting to see how the new governor steers policy and in particular how companies and banks are affected. The PCA decision is still on the discussion table while the flexibility in IBC norms is eagerly being watched by companies. Therefore, the stance taken if different can influence the way in which these participants are affected. Also, the issue of liquidity supply through non-conventional means has been spoken of and could find an alternative action from the new governor.
It should be mentioned, however, that while often it is concluded that governors decide on these issues, it is based on internal debate, discussion papers and recommendations made by the respective department. Therefore, jumping to conclusions that there will be a reversal in stance may not right.
Here one may recollect that when Raghuram Rajan took over as governor, it was believed that unlike his predecessor who was termed hawkish, the stance would change. But it did not and inflation targeting continued at a brisk pace as did the war on non-performing assets (NPAs).
How will the global community look at this step? In the past, we were not globalised and hence it did not really matter and such exits were mere events documented in the books. However, given the close relationship with various international organisations including rating agencies, such a resignation will be looked at closely.
The RBI has always been considered a frontrunner when it comes to maintaining regulatory structures. These institutions are likely to take the statement made for resigning at face value and not impute any other reason. However, they would closely be following what the new governor does on issues of quality of assets and capital as well as support to the budget on account of monetisation of reserves. These are critical factors when judging the rating of a country and will hence be followed closely.
The next few days will be very crucial for the central bank and markets and the earlier a decision is taken, the better it will be as it will eschew speculation. Hopefully, it will be back to business from next week onwards.
(The writer is chief economist, CARE Ratings)
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Updated Date: Dec 11, 2018 07:43:58 IST