Going beyond the immediate and knee-jerk reactions to the resignation of RBI governor Urjit Patel, there is a need to look at the run-up to the event dispassionately. It was a rift between the government and the regulator—and the Centre wanting to use a hitherto unused provision in the RBI Act. While one may argue the Act exists for the sake of being put to use some day, the question is: What is the pressing crisis that necessitated a series of letters invoking such an Act?
Public sector banks, under the harsh spanner of Prompt Corrective Action, are constrained to lend. And at least some of the private sector banks are unhappy that the regulator was unrelenting in terms of ownership and management issues.
The non-banking finance industry is unhappy because RBI wouldn’t budge on opening any ‘special window’ to make credit available to them. In some of these issues, the government was a direct and indirect affected party. As the owner of PSBs it had to bring in more capital, which directly impacts is fiscal math, and the issue of tight credit affects its electoral constituents.
Does any of this warrant a direction from the government to RBI to act? No. On PCA, the government could have negotiated for a time table for an exit, as it did with the Basel III capital timelines, getting them by pushed by a year. On NBFC issue, RBI was fighting with credit flow data as its tool, whereas the finance ministry seemed to be speaking for the affected in the industry. On the issue of RBI capital and transfer of reserves, it was agreed a committee would be set up, with both sides borrowing time to tide over the issue.
And when the world thought a truce was called, a larger issue over the RBI Board being empowered to boss over the central bank got triggered. The question to ask is why would you seek permanent changes in the structure of the central bank to solve temporary tightness in credit? Patel’s exit is an unsavoury episode in the annals of RBI, which will achieve very little for the government except ignominy.