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Abu Dhabi, UAETuesday 22 January 2019

Behind the resignation of India's central bank governor

The resignation of Urjit Patel jolted markets at a politically sensitive time for the incumbent government

The resignation of Urjit Patel comes amid reports of a rift between RBI and the government of Prime Minister Narendra Modi. EPA
The resignation of Urjit Patel comes amid reports of a rift between RBI and the government of Prime Minister Narendra Modi. EPA

India named a former finance ministry official Shaktikanta Das as new governor of its central bank on Tuesday a day after markets were jolted by the sudden resignation of Urjit Patel.

Mr Patel and the Reserve Bank of India have been in the spotlight for the past month. Here's some insight on the resignation and how it might impact Asia's third-largest economy.

Why did the central bank governor resign?

Mr Patel's term was not due to end until September next year. He resigned for "personal reasons". However the chief banking regulator was at loggerheads with the government of Prime Minister Narendra Modi for the past few months.

India's economy experienced cash shortages after its currency demonetisation. A key concern for the country of 1.3 billion people is the health of its banking system. The International Monetary Fund has commended the central bank for taking measures to improve the banks' recognition of bad assets and to recapitalise public sector lenders.

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Mr Patel and the Modi government have been not seen eye-to-eye on matters ranging from releasing reserves to the government, policy differences on lending and the monetary policy, specifically the interest rate regime, putting the autonomy of the central bank at stake.

What impact has the resignation had?

Mr Patel's resignation sent the country's weakening rupee lower against the dollar, and will negatively impact the investment climate of the country and increase uncertainty.

Financial markets were hit by the news and were also impacted by key state election results, which are seen as a litmus test for Mr Modi ahead of a general election to be held in India next May. Initial results indicate a setback for Mr Modi's BJP party in three key states.

Mr Patel's resignation also comes ahead of another crucial RBI board meeting, which is scheduled for Friday, where a number of issues will come up for discussion including governance at the central bank. It is unclear if this meeting will still go ahead on the planned date following Mr Patel's resignation, which came into effect immediately.

Who is Shaktikanta Das?

He is a former economic affairs secretary from 2015 to 2017, who has worked closely with the central bank, according to the media. He is currently a member of the Finance Commission of India, and the government’s representative at the Group of 20 summits. With a background in the finance ministry, he is expected to be a safe choice for the government. He is well-known for having taken a pro-demonetisation stance - a controversial move when Mr Modi's government banned the two highest value banknotes in 2016.

Updated: December 12, 2018 03:07 PM

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