The government wanted the RBI to transfer more money from its reserves; however, the central bank feels it needs to have a stronger balance sheet to deal with any potential crisis and external shocks.
In a statement, Dr Patel says, “On account of personal reasons, I have decided to step down from my current position effective immediately. It has been my privilege and honour to serve in the Reserve Bank of India in various capacities over the years. The support and hard work of RBI staff, officers and management has been the proximate driver of the Bank’s considerable accomplishments in recent years. I take this opportunity to express gratitude to my colleagues and Directors of the RBI Central Board, and wish them all the best for the future.”
The resignation of Dr Patel was not unexpected. However, his stepping down just a day before the winter session of the Parliament will help the Opposition parties corner the government.
In an election year, after the economic setback already caused by the disastrous decision to demonetise currency, the government is desperate to revitalise economic activity. But it will find it hard to give a positive spin to the resignation of the RBI governor at a time when the financial sector is in turmoil and beset by multiple scams, largely due to collusion and complicity by public sector bank chiefs, whose appointments are the government's prerogative.
In a tweet, finance minister Arun Jaitley acknowledged contributions of Dr Patel.
Reacting on Dr Patel’s resignation, his predecessor Dr Raghuram Rajan, told news channels that all Indians should be concerned about the stepping down of RBI governor. "Believe resignation of RBI Governor Urjit Patel is matter of great concern. Resignation by a government servant is a note of protest, when faced with circumstances they cannot deal with," the former governor said.
S Gurumurthy, editor of Thuglak, who is seen to have precipitated things, expressed surprise over the resignation of Dr Patel.
Moneylife sources, who were in touch with the governor, say that the RBI governor was not only tired of the fight with the government, but it has also been impacting his health in a big way.
Dr Patel however, did not resign during the RBI board meeting on 19 November 2018, as expected.
The meeting was called amid growing tensions between the Centre and the RBI after the finance ministry sought discussions under the never-used-before Section 7 of the RBI Act, which empowers the government to issue directions to the RBI governor.
During the meeting, the board had decided to form an expert committee to examine the economic capital framework (ECF) of the central bank, which will decide the amount of reserves it can maintain, handing over the balance to the government.
The board also considered other issues related to the liquidity crunch in the economy and relaxation, prompt corrective action (PCA) norms to clean up balance sheet of banks burdened with bad loans will be looked into by RBI's Board for Financial Supervision (BFS).
The RBI has been at loggerheads with the government over three demands: transfer a higher portion of its reserves to the Centre to keep the fiscal deficit in control; inject more liquidity into the system to stave off a possible blowout among housing and finance companies; and relax the norms for PCA and income recognition of banks.
The differences between the government and the central bank came out in the open after RBI deputy governor Viral Acharya spoke about the consequences of messing around with the central bank's independence while delivering the AD Shroff Memorial lecture in Mumbai on 26th October.
Dr Acharya had said, “Governments that do not respect central bank independence will sooner or later incur the wrath of the financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.”
Since then, the government has been openly critical about the RBI and was apparently prepared to use its powers under Section 7 of the RBI Act to issue directives to the central bank. However, during the board meeting, members had decided to refer this to the expert committee.
Dr Patel was appointed as governor of RBI in August 2016 replacing Dr Raghuram Rajan. Prior to that, Dr Patel was deputy governor of the RBI for over three years looking after monetary policy, economic policy research, statistics and information management, deposit insurance, communication and right to information.