Urjit Patel likely to quit as RBI Governor

The chance that RBI Governor Urjit Patel will resign is pretty big, considering the government is showing no signs of backing down from its position in the spat between the Centre and the RBI. In an interview to National Herald yesterday, former Union Finance Minister P Chidambaram expressed this as his biggest fear vis-à-vis the ongoing tussle between the Centre and the Reserve Bank of India (RBI). “The government has invoked Section 7 (under the RBI Act) consultation. This is not normal consultation. It is hinting at a directive. If the government persists and issues a direction, I am certain the Governor will resign. That will be the bad news that I feared.”

While the next Board meeting of the RBI is scheduled for November 19, there will be discussions and deliberations between Governor Urjit Patel and Union Finance Minister Arun Jaitley for sure. There is every eventuality that Jaitley and the Governor will not agree. Chidambaram has hinted at the same in his Sunday column for The Indian Express. “What will you then do? Having made your point, will you leave it there and hope that, as events unfold, the Governor will change his mind? Or will you press the nuclear button and brace yourself for the inevitable fallout — the resignation of the Governor?”

The Modi government is grappling with three key problems. “The first is liquidity, especially the liquidity situation of NBFCs and their imminent redemption obligations,” as Chidambaram says. The second is the lessening capital of public sector banks. Insufficient capital and their inability to lend money “has put many of them under the RBI’s Prompt Corrective Action,” the former Union Minister adds.

“The government wants the RBI to relax the rigour of Prompt Corrective Action; relax the capital adequacy norms for banks; and open a special window to fund NBFCs and MSMEs. Above all, the government is eyeing the reserves of the RBI and wants at least Rs 1 lakh crore to fund its election year expenditure and to meet its fiscal deficit target (which is looking increasingly difficult),” he told National Herald.

The growing gap between budgeted revenues and actual receipts have been a major worrying factor for the government. Demonetisation has been a colossal failure in this regard.

In this desperate situation, the government, in all likelihood would like to invoke the powers vested in it by Section 7 of the RBI Act and armtwist the Governor and the Board. And faced with mounting NPA problems and not willing to be the fall-guy who bungled the country’s finances and economy, the Governor may not have any other way-out but to put in his papers.