FxWirePro: Government’s feud with RBI takes out another governor

Two governors gone in a little more than two years, plunged the Indian Central Bank into an unprecedented crisis, as central bankers remain locked in a battle over the central bank’s independence with the government in handling the ongoing NPA crisis in Indian banks and non-banking financial institutions.

Urjit Patel became the first Indian central bank governor to resign his post before his appointment term ended. He had succeeded the renowned economist Raghuram Rajan who has declined another term by the Bharatiya Janata Party (BJP) government, for the first time in the central bank’s history.  

Though Mr. Patel cited personal reasons for his resignation everyone is well aware that it resulted from the feud with the government, which came into intense focus when RBI deputy governor Viral Acharya accused the government of interfering into the central bank’s independence.

The NBFCs and India’s ballooning non-performing assets (NPA) have been at the center of the feud, where the government have been asking the RBI to push more funds into the sector and even share some of its reserves, a demand which the central bankers have refused to give into, especially after harsh criticism of allowing the government to demonetize the economy despite objections from within the central bank, which led to an utter chaos within the country and put heavy strain on the small and medium sector enterprises. The feud over demonetization and harsh stance towards the NPAs, which recently reached more than $150 billion or more than 11 percent of banks’ all assets.

Astonished by the decision, the investors rushed to sell the rupee against USD in overseas trading as the announcement came after the local market close. Indian rupee declined by as much as 1.8 percent and traded as low as 72.7 per USD.

Mr. Patel’s deputy governor, Viral Acharya also joined his boss by submitting his resignation as well.