India’s rupee plunged along with equities yesterday, after Reserve Bank of India (RBI) Governor Urjit Patel quit following a dispute with the government that analysts say raises fears about its independence.
Patel stood down on Monday evening following months of tensions with Indian Prime Minister Narendra Modi’s government over interference in policy.
Patel cited “personal reasons” for his decision, but experts and media reports have said he was annoyed by New Delhi’s repeated efforts to impose its influence.
The rupee sank more than 1 percent to 72.19 to the US dollar, with speculation swirling that an RBI intervention kept it from falling further, while the benchmark Sensex in Mumbai slid 1.47 percent shortly after the opening bell.
Analysts say that Patel’s departure, extremely rare for a central banker before the end of their term, is evidence that the RBI’s autonomy is under threat.
“This is a clear signal of an eminent institution being attacked and its independence being chipped away one step at a time by the government,” independent economist Ashutosh Datar said.
“It is obvious Patel resigned because he faced a lot of pressure on issues such as bad loans, shadow banking and the central bank’s independence,” he added. “This will reflect badly on the government and probably affect the central bank’s sovereignty in the long run.”
The shock resignation comes after RBI Deputy Governor Viral Acharya told the government in a strongly worded speech in October that undermining the bank’s independence could be “potentially catastrophic.”
Indian business dailies in October and last month reported that the government had invoked never-before-used powers to send at least three letters to Patel seeking to direct policy.
Newspapers suggested that Patel was close to quitting over the issue at the time, but the tensions were believed to have been diffused following clear-the-air talks three weeks ago.
The government is believed to be unhappy with the RBI over a number of issues, including interest rates, how to deploy reserves and what to do about India’s sliding rupee.
The rupee has been one of Asia’s worst-performing currencies this year, although it has bounced back in the past fortnight, while economic growth slowed to less than 8 percent in the quarter from July to September.
It is understood that the government is pressuring the bank to enact policies to help spur growth ahead of next year’s elections, when Modi is to run for a second term.
“With the RBI governor’s resignation, one more independent institution has fallen,” Rahul Gandhi, Modi’s rival from the Congress Party in polls expected by the end of May, said in a tweet.
The government would like the RBI to lower interest rates and free up more of its cash reserves for investment, analysts say.
It has also been pushing the RBI to ease lending norms following the near collapse of IL&FS, a so-called “shadow bank” responsible for huge investment in infrastructure projects.
The Indian Ministry of Finance wants mainstream commercial banks to be allowed to lend more, but the RBI is reluctant, instead focusing on tackling a massive bad loans crisis.
Patel took over as RBI chief in August 2016 and his term was due to end in September next year. Governors are traditionally offered a second term.