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India is about to get its 3rd central bank governor in 3 years. Markets are concerned

Key Points
  • On Monday, Reserve Bank of India Governor Urjit Patel became the fourth high-profile official in the country's finance and economic sector to leave his position.
  • Arvind Subramanian, a former chief economic advisor, stepped down in June and Arvind Panagariya, former vice chairman of government think-tank Niti Aayog, left last year. Patel's predecessor, Raghuram Rajan, also stepped down in 2016 after failing to obtain a second term.
  • The combined impact of the exits, especially Patel's, is likely to raise questions amid market players.
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It's hard for any government to match the record levels of staff turnover at President Donald Trump's White House, but Indian Prime Minster Narendra Modi's administration appears to be slowly catching up.

The Reserve Bank of India Governor Urjit Patel, on Monday, became the fourth high-profile official in the country's finance and economic sector to leave his position.

Reports of his possible resignation emerged in late October but Monday's news still took markets by surprise. Differences between the central bank and the government over inflation and lending restrictions on debt-saddled public banks were believed to be factors.

Patel's exit follows that of Arvind Subramanian, a former chief economic advisor who stepped down in June, and Arvind Panagariya, former vice chairman of government think-tank Niti Aayog, who left last year. Patel's predecessor, Raghuram Rajan, stepped down as RBI governor in 2016 after failing to obtain a second term — the first time the government didn't offer a second term to a central bank head in more than two decades.

Also noteworthy is the Tuesday resignation of economist Surjit Bhalla, who was a part-time member on Modi's economic advisory council. While Bhalla didn't hold a prominent post like the rest, his departure is still significant.

Each official provided different reasons for their respective decisions. Patel cited personal matters, Subramanian pointed to family commitments while Rajan and Panagariya both said they were returning to academia.

Analysts told CNBC that it's too speculative to assume the departures reflect badly on the Modi government, but Rajan on Monday countered that notion. Speaking to Indian news outlet The Economic Times about Patel, the economist said any resignation by a government servant is "a note of protest." He called the RBI chief's resignation a "statement of dissent," adding that it was a matter of concern for all Indians.

India's string of top-level departures over recent years only underlines the fact that many of these institutions are being degraded.
James Crabtree
National University of Singapore

India's Department of Economic Affairs, part of the broader Finance Ministry, did not immediately respond to CNBC's request for comment.

The combined impact of the exits, especially Patel's, is likely to raise questions among market players.

The departure of big names in any country will likely increase risk premiums for both domestic and foreign investors, said Jahangir Aziz, head of emerging Asia economic research at JP Morgan. However, "if there are concerns about India, it should be about the direction of policies, rather than high-profile personalities leaving," he continued.

India's rupee and bonds declined sharply during early Asian trade on Tuesday.

The developments certainly don't bode well for Indian institutions, added James Crabtree, an associate professor in practice at the National University of Singapore as well as a senior fellow at the Centre on Asia and Globalisation. "India's string of top-level departures over recent years only underlines the fact that many of these institutions are being degraded."

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All of this comes as the world's largest democracy awaits results of major state elections that could affect Modi's performance in the 2019 general election.

Subramanian and Panagriya's departures are important but not as worrisome as those of Patel and Rajan, according to Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics. Patel and Rajan seem to have resigned in protest against New Delhi's growing interference in RBI policies, which certainly doesn't reflect well on the government, she warned.

Tensions with the Indian Finance Ministry on issues such as capital management and liquidity provision were believed to have influenced the decision of 55 year-old Patel, who was appointed by Modi in 2016.

Rajan, who was unpopular among Indian officials such as parliamentarian Subramanian Swamy, had expressed interest in staying on for a second term but later told colleagues that he reconsidered. That was partly driven by the fact that Modi's administration was unhappy with his policies, economists say.