Mains Paper 3: Economics
Prelims level: RBI
Mains level: Position of governor
• The Reserve Bank of India Governor Urjit Patel has cited personal reasons for resigning with immediate effect, but anyone who has followed the events of the last couple of months will know it was anything happen.
• It was a period during which the Centre and the RBI were engaged in an unseemly tussle over a clutch of issues that had a bearing on the RBI’s autonomy, something that Mr. Patel had sought to preserve.
• Raghuram Rajan pointed out, when a public servant resigns, it is a sign of protest. Mr. Patel’s decision clearly caught everyone by surprise as it came following perceptions of a thaw in relations between the Centre and the RBI, after an agreement was hammered out at a board meeting last month on some of the contentious issues, including a controversial proposal to use the central bank’s reserves for fiscal purposes.
• The larger issue that divided the Centre and the RBI which related to autonomy and the independent functioning of the Governor was never fully resolved.
• Mr. Patel’s resignation is a serious embarrassment to the NDA government, which has scrambled to make statements expressing surprise at his action and praising him for his work.
• As attempts to signal that it had nothing to do with Mr. Patel stepping down and to reinforce that he did indeed quit for personal reasons, these remarks were largely unconvincing.
Background of this resignation
• Mr. Patel’s resignation is bound to raise questions about the Centre’s ability to work with independent-minded economists.
• This coming as it does following the departures of former RBI Governor Raghuram Rajan, who was at odds with the Centre on many issues, and the sudden resignations of Niti Aayog Vice-Chairman Arvind Panagariya and Chief Economic Adviser Arvind Subramanian.
• It is true that Mr. Patel’s reclusive and non-communicative style may not have endeared him to some bankers, but his eminence as an economist and his understanding of macro-economic issues is undisputed.
• Governments have sparred with the RBI before on the issue of autonomy, but the NDA government went one step further by starting consultations under Section 7 of the RBI Act, which gives the Centre the power to direct the RBI to act in specific ways.
• The immediate priority now is for the Centre to fill the breach without wasting time. Global investors and the markets are already on edge, and they will be keenly watching, along with the ratings agencies, how the Centre handles this self-created crisis.
• The incoming Governor is bound to be judged, among other things, by perceptions about his independence.
• The RBI cannot be treated as if it is just another government department.
• The Centre will now need to demonstrate that a post-Patel central bank will continue to enjoy operational autonomy. Anything less will not go down well with both investors and the markets.
Q.1) Consider the following statements regarding Marginal Cost of funds based Lending Rate (MCLR)
1. The new MCLR replaces Base Rate System
2. MCLR aims to improve the transmission of policy rates into the lending rates of banks.
3. MCLR will bring transparency in the methodology followed by banks for determining interest rates on advances.
Select the correct code
a) 1 and 2
b) 2 and 3
c) 1 and 3
d) 1, 2 and 3
Q.1) Why Urjit Patel stepping down as RBI Governor is a major embarrassment for the government?