Urjit Patel's quiet exit from Reserve Bank doesn't really help India

People who know Urjit Patel, the Reserve Bank of India governor, told me he would stay on and fight. That was in late October, when it became clear from his deputy’s speech that New Delhi was making a determined attempt to curtail the RBI’s authority as a banking regulator, and even to raid its capital.

But after a November meeting of the institution’s board, it looked like the central bank and the government had decided not to bring matters to a head and Patel, whose term expires in September 2019, would stick around. The truce was short-lived. Citing personal reasons, the governor said on Monday that he’d be stepping down immediately, just days before another crucial meeting of the RBI board. The terse resignation note made no attempt to thank the country’s finance minister or Prime Minister Narendra Modi, both of whom said goodbye to Patel on Twitter.

Indian markets are already jittery about state elections, whose outcome will be known Tuesday. Any sign that Modi’s popularity is waning amid a deepening agrarian crisis would make investors nervous ahead of general elections next year. An uncertain period for India’s politics just as its central bank’s integrity is under assault could accelerate the $2.9 billion flight of foreign capital from the country’s equity markets this quarter.

Patel’s decision to leave rather than accept the threat to the RBI’s autonomy has a certain nobility. But he might have offered a fuller explanation of the circumstances behind his exit. Has the government used (or threatened to use) Section 7 of the RBI Act to instruct the governor in the “national interest?” If so, we need to hear from Patel about what exactly he was being told to do. Release state-run banks — loaded down with bad debts — from lending restrictions? Relax a circular that made it hard for errant corporate borrowers to avoid bankruptcy courts? Give a special dividend to the government?

Patel’s truncated term was unhappy from the start. Two months after he got the job, Modi’s government made him an unwilling accomplice in its decision to ban 86 percent of the country’s cash to try to freeze out ill-gotten wealth. He didn’t protest then. But he did try to cleanse a $200 billion bad-loan overhang from the banking system. He even revealed that 99.3 percent of the notes banned by Modi had ended up in bank accounts, confirming that Modi’s drive had proved to be a nonstarter.

However, that early silence caused lasting damage. It gave legitimacy to voodoo economics. The final straw was the government’s appointment of S. Gurumurthy to the RBI board. The Chennai-based accountant, who accused Patel’s predecessor of being unfairly harsh on state-run banks, was an ardent advocate of demonetization. He now supports giving the government control over money-printing to support smaller enterprises; the same firms that suffered the most from Modi’s note ban.

As a respected central banker who’d worked to set India on a formal inflation targeting path, it’s unsurprising that Patel couldn’t accept oversight from a board that isn’t fit to lead a monetary authority. Still, his decision to leave without creating a fuss is a final act of unhelpful silence. The future of the 83-year-old institution would have been much better served with a stark warning about its present state.