India Stock Futures Tumble After Central Bank Head Unexpectedly Resigns In Government Spat

India’s central bank governor Urjit Patel unexpectedly announced his resignation on Monday following a tense stand-off with Prime Minister Narendra Modi’s government over the bank’s independence.

In a statement on the Reserve Bank of India’s website, Patel said that "on account of personal reasons, I have decided to step down from my current position effective immediately." He stepped down from a position he held since September 2016, when he was selected to replace Raghuram Rajan.

The Oxford-trained Patel, who had tried to stay away from the spotlight, was initially seen playing along with Prime Minister Narendra Modi after he backed a ban on high-value currency notes in November 2016. Since then, he has waged a war to get India’s struggling banking system in order and punish errant borrowers who have stopped servicing their debt even though they have the ability to pay.

His exit comes at a time when India, which is closing in on Italy to become home to banks with the worst bad-loan ratio among major economies, is delivering a bitter pill to resuscitate its banking sector.

Earlier this year, the RBI introduced new rules forcing lenders to declare a delinquent borrower even if payments were overdue by a day. That was aimed at easing mounting bad loans, particularly from the power sector. Patel also moved in to ring-fence weak state-run banks. Currently, a total of 12 banks -- 11 in the public sector and one in the private sector-- are under the so-called prompt corrective action framework that places curbs on lending, expanding branch network and dividend distribution.

The government wanted the RBI to relax the rules so banks can lend more easily and keep the economic engines firing ahead of a general election next year. But the RBI wants these banks to be slowly nursed back to health. According to the central bank, it needs to be independent so that loan losses of banks aren’t s

India's government wanted the RBI to relax the rules so banks can lend more easily and keep the economic engines firing ahead of a general election next year. But the RBI wants these banks to be slowly nursed back to health. According to the central bank, it needs to be independent so that loan losses of banks aren’t swept under the rug by compromising supervisory and regulatory standards.

That independence came under threat last month, when the government sought greater oversight on the central bank’s functioning and a review of its economic capital framework.  Patel has also disagreed with the government’s demand for more share of profits from the RBI’s operations. A transfer of more dividend helps the government meet its budget gap aim.

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Patel is the second governor of the Reserve Bank of India to depart amid frictions with the government during Modi’s administration; his widely-respected predecessor, Rajan, left after the government refused to extend his tenure, unhappy with his outspokenness on issues that the administration considered beyond his purview.

Patel's resignation was the culmination of long-mounting tensions with Modi’s government which erupted into the public view in October, when Patel’s deputy gave an impassioned speech focusing on the need for central bank independence.

As the Financial Times reports, Patel's decision comes ahead of what was likely to be a tense meeting on Friday, when the RBI’s governing board will be pushing the RBI to make many concessions to governments.

Patel’s departure could clear the way for Modi’s government to appoint a more pliant figure, more amenable to its desire to ramp up the economy ahead of expectations next year, while crushing even the most naive speculation that the central bank of India (or anywhere else for that matter) is independent.

But it is likely to unnerve markets and investors, who have counted on a conservative central bank to maintain macroeconomic stability. Sure enough, futures of the SGX Nifty 50 tumbled as much as 1.5% on the news.

As Bloomberg notes, the Indian central bank is not alone in facing political heat with the challenges to the independence of monetary policy makers a theme of 2018. The Federal Reserve has weathered criticism from U.S. President Donald Trump, while counterparts in Turkey, New Zealand and the U.K. have also been pressured by policy makers.