For the last two months it was been speculated that differences between the RBI governor and policy makers in Delhi on crucial issues like utilisation of excess reserves and use of section (7) would force Dr Urjit Patel to resign. Given the fact that despite many governors having differences with governments of the time, only one governor had taken a similar step. So, Patel’s resignation was seen by many as being of low probability. Besides, the air of civility between the government and the RBI after the board meeting on November 19 gave the impression that the rocky patch was over and going forward the contentious issues would get sorted out.
The resignation has once again bought the spotlight back on the differences between the RBI and government. It can only be speculated whether excessive interference from the government or something else led Patel to quit. The truth will be revealed only when Patel decides to go public with his reasons for quitting office. Given the track record of public servants, the country probably will have to wait for a book by Patel to figure out what actually triggered his resignation at time when country could ill afford it. Given the fact that there will be no going back, there is tough work ahead for policy makers. They should be burning the midnight oil to ensure that the impact of such an event does not last more than what it should – at the most for a couple of hours after financial markets are opened for trade.
The government, for its part, should focus on managing two things. First, short-term sentiment and perception. In financial markets, finally it is the reality of economic numbers that matters. But, before reality come perception and sentiments. Both are fragile in nature. Sometimes in financial markets when perceptions are not countered in a correct manner, they trigger a chain of events which worsen the situation. The recent fiasco at IL&FS is a case in point. Despite the writing on the wall that defaults are happening, no one bothered to take the first step till the dirt hit the roof. In order to manage perception, it ought to ensure that there is no extreme volatility in financial markets. Especially in the currency market, because it is the mother market and other segments of the financial market, be it debt or equity, take big cues from the sentiment of currency markets. This is not to suggest that the government should try to support the rupee to prove the point that the resignation of the RBI governor does not matter. However, speculators should not make merry by pushing the rupee southward taking advantage of the event. Given the fact that oil prices are stable, there is no reason for the rupee to be pushed down in a dramatic manner.
The second aspect – and this is more critical – is to find a credible successor to Patel, sooner rather than later. The fact is that while the resignation has an element of surprise for people outside the system, surely policy makers had counted this as a possibility and must have a list of people whom they would have considered as replacement. What the government should not do is put a retired or a current bureaucrat as a new governor of RBI who is seen as a pliable person and do what the government dictates. Instead, the next occupant of the august office should be an individual with a good track record of handling macro and micro economic challenges. The reason why handling challenges is important at this point of time is that the Indian economy could be facing major challenges against the backdrop of a global economic slowdown and impact of trade wars. Also, along with ability the next incumbent should have a reputation for being independent, one who will protect the independence of RBI as an institution. The reason why credibility of that individual is important is that while the governor is the face of RBI, there are others in RBI whose morale would get impacted if they are forced to work under someone who they don’t think should be in the leadership position.