Patel’s Exit Roils Indian Markets Already Jittery From Election

Patel's departure adds another layer of risk to an economy facing multiple threats, both foreign and domestic.


Urjit Patel’s shock exit as governor of the Reserve Bank of India roiled financial markets already nervous about early election results showing Prime Minister Narendra Modi’s ruling party losing support in key states.

The rupee weakened 1.3 percent against the dollar at 10:13 a.m. in Mumbai, set for the steepest two-day drop since 2013, the year of the taper tantrum that saw the currency tumble with its emerging-market peers. Yields on 10-year sovereign bonds rose 9 basis points and the S&P BSE Sensex gauge of stocks slid 1 percent.

Citing “personal reasons,” Patel quit nine months away from the end of his three-year term as governor, and ahead of a board meeting on Friday, at which government representatives are expected to push the RBI to do more to ease a cash crunch and hand over more of its excess capital. Exit polls in key state elections showed a close fight for Modi’s party in former stronghold regions, adding to market uncertainty.

Patel’s departure adds another layer of risk to an economy facing multiple threats, both foreign and domestic. The rupee is among the worst performers in Asia this year, the economy is weakening and the banking sector is in crisis.

“Governor Patel’s sudden exit intensifies market uncertainty and is negative for the Indian rupee,” said Prakash Sakpal, an economist at ING Groep NV in Singapore. “The next central bank chief will be under intense pressure from the government to concede to the latter’s demands for more growth-friendly policies ahead of general elections in early 2019.”

Patel, who succeeded Raghuram Rajan in September 2016, has been at loggerheads with the finance ministry, which wants the RBI to ease lending restrictions on some banks and has opposed higher interest rates in the past. The tension was laid bare in an October speech by Deputy Governor Viral Acharya, who defended the central bank’s independence and warned of a market backlash should it be undermined.

Patel has tried to burnish the RBI’s credentials as an inflation-fighting central bank. After hiking interest rates twice this year, the RBI left rates unchanged last week, while giving itself room to move again by sticking to its “calibrated tightening” stance.

The exit of Patel may lead to a less hawkish bias at the RBI and could mean a rate cut returning to the agenda as soon as February, said Abhishek Gupta at Bloomberg Economics in Mumbai.

Investors will hope for a credible successor who’ll bring continuity, said economists at Citigroup Inc. They noted that nine of the bank’s governors since 1970 have had previous experience in institutions such as the International Monetary Fund, and pointed out that it took more than two months to replace Rajan.

Investor confidence in Indian assets had only recently bounced back, helped by a slide in oil prices and a dovish tone from the Federal Reserve. November saw the best rupee gains in nearly seven years, while local stocks saw their best month since July.

Oxford-trained Patel, who has shunned the public spotlight as governor, was initially seen as a Modi ally after he appeared to back the prime minister’s controversial ban on high-value currency notes in November 2016, which hurt the economy and led to thousands of job losses. Since then, he has battled 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.

Patel tightened rules on weak state-run banks earlier this year, restricting their ability to lend. The government wants 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. It also wants the central bank to hand over more of its excess capital.

The Indian central bank is not alone in facing political heat, with 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 and the U.K. have also been pressured by policy makers.

“Short-term political gain but with potentially incalculable long-term damage to the commitment to credible economic policy” Vivek Dehejia, an associate professor of economics at Carleton University in Ottawa, said on Twitter. It “is a very tragic day for India and for sound economics.”

With assistance from Bloomberg’s Archana Chaudhary, Saloni Shukla, Vrishti Beniwal and Ameya Karve.

(c) 2018, Bloomberg

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