Snapshot - Economics

Resignation rocks rupee and Indian reform outlook

The resignation of India’s central bank governor has implications for politics and financial markets

11.12.2018

  • India’s central bank governor, Urjit Patel, on Monday resigned his position amid elevated tensions with the government.
  • The Indian rupee responded by losing as much as 1.7% against the US dollar following the announcement. Year to date the currency is down close to 13.5% relative to the dollar.

Urjit Patel’s resignation as governor of the central bank follows a protracted period of tension between the Reserve Bank of India (RBI) and the government. This revolves around issues in the shadow banking system and the government’s request for the RBI to transfer funds to the government’s coffers.

Ceasefire short-lived

It is unnerving that the resignation comes after an apparent ceasefire and just ahead of an RBI meeting. It is hard not to infer that Patel has stepped down because of pressure from the government to act in ways he felt unable to condone.

The RBI’s reputation has only recently been restored, thanks to the previous governor, Raghuram Rajan. His own exit had already prompted concerns that the government wanted a more pliable central bank and this latest development will reinforce the fear that we are headed for a central bank driven by government policy rather than orthodox monetary economics.

Ramifications for financial markets and politics

This will spell uncertainty, and weakness, for the rupee, and damage the government and Modi’s pro-reform image. The damage would likely be compounded by the wrong replacement. Monetary policy needs to remain prudent, and moral hazard in the financial system avoided. Can a government seeking re-election avoid temptation?