Why India's Central Bank Chief May Resign

The bad news keeps coming for emerging market equities. Shares prices in India, the world’s fastest growing large economy, fell on Wednesday and were on course for their worst month since February 2016 as the ongoing spat between the country’s government and central bank turned ugly.

On Wednesday, Indian news outlets including CNBC-TV18 reported that Reserve Bank of India (RBI) Governor Urjit Patel is contemplating resigning from his position after the Indian government threatened to prevent the RBI from calling its own shots.

The market's immediate reaction forced the government to release a statement stressing the central bank's independence. “The autonomy of the Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this,” said the finance ministry, following which shares clawed back losses.

What Is Section 7?

Section 7 of the RBI Act enables the government to instruct the central bank on certain issues that it believes are serious and in public interest after a consultation with the governor. Disagreements over several issues have led the Indian government to invoke it for the first time in the history of the country’s independence, according to India Today.

BloombergQuint separately reported that the government had sent "several letters" to the RBI seeking consultations under Section 7 but no directions have been given. The news website pointed out that Section 7 will not be considered invoked until instructions are given. The letters reportedly voice the government's opposition to the prompt corrective action framework installed by the RBI to help resolve India's public sector banking crisis. 

"RBI governor may even consider resigning. All options on the table," multiple sources familiar with the matter told CNBC-TV18 on Wednesday. There is an "irreversible breakdown between RBI governor and the government," one of the sources added.

The government has also been putting pressure on the central bank to part with some of its Rs 3.6 lakh crore ($48.93 billion) reserves to fund the country's fiscal deficit ahead of the general election in May, according to CNBC-TV18.

RBI Deputy Governor Viral Acharya voiced his displeasure last week in a speech. He said, "Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution."

News that the government now plans to take matters into its own hands and undermine the RBI’s objections to its requests weighed on the rupee and the Indian stock market.

The NIFTY 50 index fell after investors dumped shares in the likes of Coal India Ltd. (COAL), Dr Reddys Labs (RDY) and Tata Steel Ltd. (TISC). With the ongoing spat between the government and the RBI showing little sign of dissipating, the exchange-traded-funds (ETFs) that many U.S. investors use to gain exposure to the country are likely to face further volatility.

For many foreign investors, ETFs are the easiest way to invest in India. Popular ones include Direxion Daily MSCI India Bull 3x ETF (INDL), Columbia India Small Cap ETF (SCIN) and iShares MSCI India Small-Cap (SMIN).


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