As India looks for new central bank head, investors worry about independence

Mumbai, New Delhi: Reserve Bank of India (RBI) Governor Urjit Patel’s shock resignation following a policy tussle with the government sent tremors through financial markets on Tuesday, and investors are keen to see the government quickly name a credible replacement.

Both foreign and domestic investors say any openly political appointee with little macro-economic experience, would not sit well in equity, currency and debt markets that have already sold-off following setbacks suffered by Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) in state polls this week.

Investors worry the government will use the central bank to do its short-term bidding to boost the economy for political reasons, with a general election due by May, without fully considering the long-term consequences for inflation and financial stability.

Patel announced his resignation on Monday, after India’s financial markets had closed.

Among the candidates close to Modi and being touted by government officials is Hasmukh Adhia, who retired as finance secretary in November.

He led Modi’s most controversial policies — the abolition and replacement of high-value bank notes in an attempt to crack down on black money, and the introduction of a nationwide goods and services tax.

“Governor Patel’s resignation leaves many open questions,” said Mitul Kotecha, senior emerging markets strategist at TD Securities. “Any hint of an overtly political appointee will likely not bode well for India’s markets over the medium term.”

The rupee touched a nearly one-month low against the US dollar on Tuesday.

Forward contracts plunge

Following Patel’s announcement, forward contracts tracking the rupee against the dollar posted their biggest fall in more than five years.

Bond and equity markets also sold off sharply early in the day on Tuesday, before turning around later.

The timing of Patel’s resignation, along with the likelihood of losses for the BJP in the five state elections, may spell trouble for foreign investors who have been upbeat about India’s long-term prospects with Modi at the helm.

“We will have to see how much recovery the government can make by general elections next year,” said Ai Fujiwara, senior fund manager at Eastspring Investments. “Indian markets will likely remain volatile for now.”

Former RBI Governor Duvvuri Subbarao echoed investors’ concerns in comments to CNBC-TV18.

‘Serious introspection’

“The government will have to do some deliberation and serious introspection,” Subbarao said.

“The next incumbent governor will of course have the task of restoring the credibility of the RBI and entering into a working arrangement with the government which does not give the impression of being influenced beyond acceptable levels by the government.”


Possible candidates

These are some of the people being discussed as possible candidates to replace Patel:

HASMUKH ADHIA: Adhia, 60, retired as finance secretary in November. He was viewed as close to Modi and known as someone handpicked by Modi to spearhead the government’s most controversial move to date to abolish high-value banknotes, the so-called demonetisation.

He also served as principal secretary to Modi from 2003 to 2006, when Modi was chief minister of Gujarat state.

Adhia was at the front line of investors’ ire after a botched implementation of the nationwide goods and services tax in 2017. Critics said its complexities drove many small enterprises out of business and cost hundreds of thousands of people their jobs.

He was also criticised for implementing a tax on long-term capital gains that sent the stock markets tumbling. Widely known for his proximity to the top ranks of the BJP, the Gujarat-cadre bureaucrat moved to the finance ministry in 2014, months after Modi became prime minister.

SHAKTIKANTA DAS: Das, 61, is former finance secretary and currently a member of the federal finance commission, and one of India’s serving G20 representatives. He was widely perceived to be a contender for the top job at the RBI after the exit of former governor Raghuram Rajan in 2016.

He previously served on the central bank’s board. Das came under fire for his pro-demonetisation stance and he was the most visible and vocal bureaucrat at the time Modi withdrew the high-value bank notes in 2016.

Last year, Das criticised the methodology of global rating agencies and sought a sovereign rating upgrade. Das has worked extensively in the budget division under both Modi’s government and the previous coalition led by the Congress.

SUBHASH CHANDRA GARG: Garg, 58, the economic affairs secretary, was among the most outspoken in defence of the government as tension with the RBI were building up over governance and banking issues.

He called for more liquidity for the troubled shadow banking sector and also questioned the RBI’s governance structure. Garg also waded into controversy for undermining the central bank’s autonomy with his suggestion that India needed an independent payment regulatory board.

Perceived to be the finance ministry’s most staunch defender of its fiscal path, he has for months played down fears of a weakening rupee and steered attention to the RBI’s forex reserves as firepower to defend against any currency volatility.

SANJEEV SANYAL: Sanyal is principal economic adviser to the finance ministry. An Oxford alumni, Sanyal represents India in several international forums and is the co-chair of the framework working group of the G20.

Sanyal, who quit as managing director and global strategist at Deutsche Bank in Mumbai in 2015 to join Modi’s finance ministry team, has worked in financial markets since the mid-1990s.

He has been closely involved in the bankruptcy reform process in his current role in the finance ministry. Sanyal has written several books on Indian history and geography.

RAKESH MOHAN: Mohan, 70, had two stints as a deputy governor of the RBI.

He has also served as secretary at the department of economic affairs in the finance ministry, and held positions at the International Monetary Fund.

He has previously been in charge of monetary policy, financial markets, economic research and statistics at the RBI.

Mohan has written three books on urban economics and development, along with two on monetary policy.

Mohan, who has a PhD in economics from Princeton, teaches at Yale University as a senior fellow at the Jackson Institute for Global Affairs.