While the RBI-board meeting on November 19 ended on "cordial" note, the buzz that the government was hoping to make the RBI a board-led body, weakening the powers of the governor and his team, kept tensions alive.
It was February the 10th. Both Finance Minister Arun Jaitley and former RBI governor Urjit Patel were holding the customary joint post-Budget press conference. A low-key Patel kept his answers short and faded into the background, while Jaitley took the lead — as one would expect.
But as soon as Jaitley began gushing about how oil prices were (then) on a downward path, Patel got uncomfortable. A rather introvert Patel could not help but speak up before the finance minister finished. “India needs to be prepared either way; whether oil prices go up or down,” Patel said.
It probably was nothing more than two perspectives; one coming from a union minister and other coming from a regulator. And somehow it was more; that Patel wasn’t necessarily the ‘yes man’ everyone thought he would be.
Over the next one month, his voice of dissent got louder — and noticeable — as he pushed back on the government’s attempt to pin the blame on the RBI for the biggest banking scam in India pulled off by diamantaire Nirav Modi and his uncle Mehul Choksi.
And that was the beginning of Patel, a perceived ‘yes man’, rising to every occasion with an assertive ‘no’. No to relaxing norms for weaker banks, no to diluting bank clean-up rules, and no to allowing the government dive into the RBI’s reserves.
With each no, his image, blotted by demonetisation, improved. He started to be seen as the scholar-economist that he was and the tough regulator he should be. The RBI, under Patel, also said no to Axis Bank’s Shikha Sharma and Yes Bank’s Rana Kapoor and acted tough on Kotak Mahindra Bank and Bandhan Bank over promoters’ shareholding.
In fact, Global Capital — news, opinion and data service organisation — recently praised Patel for his focused approach on controlling inflation, bank clean-up, and willingness to voice his opinion on the global stage.
When Patel was elevated from being Raghuram Rajan’s deputy to taking his place — to become RBI’s 24th governor at the age of 53 — the decision screamed of the effort to avoid another outspoken governor.
“Rajan, referred to as a ‘rock star’ by some parts of the India media, was flamboyant. Patel was quieter, appearing a man better suited to analysis than action. In office, he challenged that assumption,” Global Capital wrote.
Initially, Patel played by the book: he did not respond to criticism over his silence on demonetisation. But soon enough, he was able to implement one of the most important reforms in the RBI’s history.
Patel is being credited for flexible targeting of inflation, for which the Narendra Modi government deserves an equal credit. Additionally, the Modi government vested the RBI with more power to act upon mounting bad loans problem, showing the two could work together on key issues.
What went wrong was that in the run-up to the elections, the government pushed for dilution of reforms. Faced with shortfalls in revenues, the government eyed the RBI’s reserves. Many believe that what went terribly wrong was the decision to invoke Section 7 of the RBI Act to rush the central bank into meeting the government’s demand.
Even the people who often criticised the RBI for being slow in cutting repo rate saw the use of Section 7 as finance ministry arm-twisting the governor.
While the RBI-board meeting on November 19 ended on “cordial” note, the buzz that the government was hoping to make the RBI a board-led body, weakening the powers of the governor and his team, kept tensions alive.
On December 5, when all eyes were on Patel’s first appearance in the media since the rift played out in public, he refused to speak on the issue. “I already said that I would avoid those questions. We are here discussing the monetary policy committee resolution,” he said.
Patel defended the decision to continue with ‘calibrated tightening’ stance even as oil prices had fallen 30% by saying that oil at a lower price was more volatile than at higher price — and that India needs to be prepared.
On December 10, Patel announced his resignation in a brief statement, which cited personal reasons with a deafening silence on any role the government played during his tenure.