Urjit Patel's sudden and surprise resignation, citing unspecified personal reasons, may not act as a bolt from the blue for the government. But it would not save the NaMo administration from a barrage of uncomfortable questions inside and outside Parliament where the Winter Session begins from today. Till a credible face takes the charge as the new RBI governor, the global credit rating agencies may keep India on critical credit watch.

 

Late Monday, rating agency Moody’s Investors Service, in a statement, said the independence of a country’s central bank is an important consideration while assessing a country’s institutional strength and any attempt by the government to curtail it would be credit negative.

 

Moody's observation was based on reports that Patel's resignation was the fallout of his increasing policy differences with the government which wanted him to go slow on applying brakes on PSB lendings to the MSMEs.

 

Politically, the campaign inside the BJP, spearheaded by irrepressible Subrahmanyan Swamy, against FM Arun Jaitley may escalate and fresh questions may be asked about his ability to run the critical FinMin which has earlier seen a similar exit of renowned economists, Subramaniam and Panagariya.

 

Fund managers feel that the resignation will be “taken negatively by the market” on an immediate basis and his replacement will hold the key. The stock market opened on Tuesday on a negative note.

 

Former RBI governor Raghuram Rajan told Reuters: “I think Dr Patel has made a statement. We should go into the details on why there was an impasse which forced him to take this ultimate decision and I think this is something all Indians should be concerned about because the strength of our institution is really important.”

 

“A lot will depend on who replaces Dr Urjit Patel. A man or woman of standing and credibility will convince the market that the RBI is an institution and not an individual and the good work done by the RBI in inflation management will be carried forward,” said Nilesh Shah, MD, Kotak Mahindra Mutual Fund.

 

A global fund manager said that given the fact that around $40 billion of unindexed money is in Indian markets and Indian bonds are not part of any bond markets, investing in India is a risk for bond fund managers and a small “underperformance” can hit hard as funds can exit.

 

Despite such concerns, PSU banks, as a group, heaved a sigh of relief on the resignation of Patel who was seen as being unsympathetic to their cause. PSB officials believe the new Governor may be more “realistic” and help in a faster exit of some PSU banks out of the RBI’s PCA framework.

 

The new Governor, they said, could also hand over a portion of the RBI’s surplus capital to infuse capital in stressed PSU banks.