Patel's resignation highlights risks to RBI's policy priorities: Fitch

December 12, 2018 21:03

Fitch Ratings Wednesday said the abrupt resignation of Urjit Patel as Reserve Bank Governor highlights the risks to RBI's policy priorities, and increased government influence on the central bank could undermine the efforts to address bad loan problems.

It further said full implications of Patel's exit will only become clearer once there is some indication of the RBI's policy approach under his replacement, Shaktikanta Das, an experienced government bureaucrat.

After a prolonged face-off between the finance ministry and the RBI on contentious issues like optimum capital reserves that the central bank should hold and ways to ease liquidity for micro, small and medium enterprises, Patel resigned abruptly from the post of the governor on December 10, nine months before his term was scheduled to come to an end in September 2019.

The government Tuesday appointed former Economic Affairs Secretary Das as the new Governor. Das had played a key role in overseeing government's move to demonetise high value currency notes in 2016.

Fitch, in a statement, said: "The resignation of the RBI governor... follows a period of government pressure on the central bank to spur economic growth, and highlights risks to the RBI's policy priorities."

The RBI's efforts to address bad loan problems have the potential to improve banking-sector health over the long term and its commitment to inflation targeting has supported a more stable macroeconomic environment in recent years.

"Increased government influence on the central bank could undermine this progress," Fitch said.

It said that a rollback of measures that address long-standing bad-loan problems and restrict the growth of weakly capitalised banks could have a "negative impact" on the credit profiles of affected banks and may increase risks in the financial system.

"General elections due by May 2019 will create a political incentive for the government to push for more supportive RBI policies," Fitch said.

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