Well, there goes the RBI’s credibility.
Urjit Patel apparently has some undisclosed “personal” issues he needs to work through and in order to free up some time for that, he’s going to go ahead and resign, which is obviously terrible news for anyone who was concerned about central bank independence in India.
“On account of personal reasons, I have decided to step down from my current position effective immediately”, Patel said Monday.
That of course caused rupee NDFs to weaken – “effective immediately.”
This comes at the worst possible juncture as political concerns around state elections had already conspired to push Indian equities to their worst day in months.
It looks to me like that slide is going to get worse, at least if you go by Nifty futs, which are currently down sharply on the Patel knee-jerk.
I’m no expert on Indian politics, but a quick, common sense read on this situation would appear to be that a bad outcome for Modi’s party could conspire with sour sentiment around the Patel news and a possible continuation of the rebound in oil prices to catalyze a pretty egregious selloff in Indian assets.
On top of all of that, this comes days ahead of an RBI meeting and according to early reports, the government did not know about Patel’s plans ahead of time. His efforts to bolster the stability of the domestic banking system have been met by political pressure as the government hopes to spur lending and keep the economy running hot. In other words, this is a manifestation of the same dynamic that’s played out in Turkey and, unfortunately, in the U.S.
Patel has raised rates this year in an effort to keep a lid on inflation and support the rupee in the face of Fed hikes. At one point, he penned an FT Op-Ed imploring Jerome Powell to be cautious about paring down the balance sheet against a backdrop of increased UST issuance (more here).
Former RBI head Raghuram Rajan called Patel’s decision “a statement of protest.” He was “faced with circumstances [he] could not deal with,” Rajan said in an interview with ET Now television.
Now, Modi will have to “deal” with it. And so will markets.