Sudden departure of India's central bank chief raises questions about its monetary independence

  • Reserve Bank of India chief Urjit Patel resigned Monday, effective immediately.
  • The timing comes just months before national elections and at a time when India is trying to attract foreign investment.
  • India' s government has criticized the RBI for its push to clean up the country's banking sector.
Urjit Patel, governor of the Reserve Bank of India (RBI)
Dhiraj Singh | Bloomberg | Getty Images
Urjit Patel, governor of the Reserve Bank of India (RBI)

The sudden departure of India's central bank governor Urjit Patel on Monday has raised a number of questions about the Reserve Bank of India's ongoing struggles.

The primary focus for investors is whether Patel resigned due to growing pressure from India's government to lower rates and conduct looser monetary policy as the countdown to next year's general election kicks off. Patel was reportedly criticized by the government for the central bank's relentless push to clean up India's banking sector.

"Investors' concerns over the independence of the RBI are now higher than ever, but it is unlikely that the government will name another figure with a reputation for independence to lead the Bank," said Sasha Riser-Kositsky, a senior analyst at Eurasia Group.

Patel's resignation comes less than three years after his predecessor Raghuram Rajan was not confirmed for a second term as central bank governor in 2016, likely due to growing tensions between him and India's government.

"Investor confidence will be roiled due to this (losing two independently minded central bank governors within one term is not a great image for foreign investors)," said Akhil Bery, a senior research associate in McLarty Associates' India & South Asia practice.

Experts say the timing of Patel's departure from his post as central bank governor comes at a challenging time for two reasons.

India's government lead by Prime Minister Narendra Modi is facing reelection next year. One factor that helped Modi in 2014 was the backing of investors who supported his pro-business policies. However analysts say Patel's departure could have an impact on Modi's image.

On Tuesday, results from four state elections in India will shed light on whether Modi is losing support from his base ahead of the national election in April 2019.

At same time, India is trying to attract new investors and companies while also fending off competition from China. Analysts say any uncertainty in India's governance of monetary policy could be a setback.

Alyssa Ayres, a senior fellow at the Council on Foreign Relations and author of "Our Time Has Come: How India is Making Its Place in the World," told CNBC over email: "The widely-discussed allegation that the Modi government is pushing for greater authority over the RBI and diminishing its traditional independence is further cause for concern. The Indian economy has done well with an RBI that functions independently and through its own economic, not political, decisions. It should be allowed to continue without political interference."

The next monetary policy meeting in India is set for Friday.