‘By not quitting, Urjit Patel acted with maturity’

MUMBAI/NEW DELHI: Reserve Bank of India (RBI) governor Urjit Patel is seen to have acted with maturity and restraint by not resigning in the wake of the central bank’s spat with the government, a former RBI governor and a policymaker have told TOI on the condition of anonymity.

The government’s move to withdraw the sword of the never-used Section 7 hanging over the RBI is being interpreted as a well thought-out measure to defuse the tension as pressing on with directions to the central bank would have possibly forced Patel to resign. The consequences of his resignation would have been negative for the markets and the overall economy ahead of the 2019 general elections.

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The former RBI governor and the key policymaker said that even though the RBI has ended up ceding some independence in its fight with the government, Patel’s decision not to aggravate the situation has helped calm tempers. During the RBI-government standoff, Patel had also come under fire for his style of functioning, stubbornness and sometimes lack of communication — traits which have been also cited as triggers for the showdown.

Patel graph.

“Getting at the RBI, which has been an oasis of professionalism in India, would have created a political crisis, six months before elections and would have triggered an economic problem. It would have sent a message that the government is driven by short-term compulsions and is willing to sacrifice long-term stability,” said the former central bank governor.

The former policymaker, quoted earlier, said, “Patel did not let his ego come before national interest. Imagine the turmoil in the markets had he resigned by remaining stubborn. If he had quit, two of the deputy governors would have also resigned and it would have been chaos.”

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He added, “North Block was aggressive in its demands. I would say that the entire RBI team as well as the government showed maturity and worked to resolve the issue. This point must be highlighted as we debate who won and who lost.”

The former governor refuted the view that Patel forced the government’s hand by his intransigence. “The issues raised by the government were such that the spat would have come about even if there was some other governor other than Patel,” he said. “It is not as if Patel did not try. He met the Prime Minister and the finance minister. If the government gets pressing and a board gets too strident, what can a governor do?” he added.

While Patel has staved off a crisis by not quitting and giving in to some demands of the board, the RBI has lost a bit of its autonomy. The issue of RBI dividend and sectoral requirements have been taken up by the board, even though the capital adequacy ratio requirement is seen as quintessentially a regulatory matter. This is the first time the capital adequacy prescription is coming from the RBI board rather than the central bank, experts said.

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