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Pakistan Might Experience Fallout From Urjit Patelís Resignation From The Reserve Bank of India

20 December, 2018

On Monday, 10th December, Urjit Patel issued his resignation letter to the Indian government, informing them of his decision to leave as head of the Reserve Bank of India (RBI).

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It meant an end to weeks of speculation regarding his position and threatened to further destabilise the Indian economy.

The Indian government and the RBI had been in a period of disagreement for a number of weeks leading up to the high-profile resignation of Patel. "On account of personal reasons, I have decided to step down from my current position effective immediately," a prepared statement read. The RSI was already at odds with the Indian government over the slide of the rupee and the government was equally unhappy with the RBI regarding interest rates, deployment of reserves and how to deal with the sliding rupee.

The Indian rupee (INR) has been one of the worst performing currencies in Asia through the last year and this coincides with rising oil prices and economic growth that has slowed to below 8 percent in the last quarter, thus prompting the unprecedented move by Modi to send letters to the RBI in order to affect and influence the bank’s policy decisions - culminating in Patel’s decision to quit.

However, the RBI is not a statutory, independent entity. The governor is always a governmental appointment, although it does enjoy a certain autonomy and mandate to control such things as inflation and India’s growth. The main source of this disagreement focuses on just how much autonomy the RBI should have as the administration of Prime Minister Narendra Modi seeks to reduce curbs on lending and gain access to the RBI's surplus reserves.

The big concern is that any influence from Indian government will ultimately undermine the RBI’s independence. Just two months ago, Deputy Governor for the RBI, Viral Acharya, said that doing so would be “potentially catastrophic” and would predicate a drop in India’s financial markets. However, the plea fell on deaf ears in the Indian government who have been pushing hard for the RBI to relax its policies before the upcoming general election in May next year. India's currency fell immediately after this news, dropping 1.2 percent against the US dollar, whilst Indian stocks also suffered.

Source: Pixabay

This news will ultimately affect the current trade relationship between Pakistan and India, as well, as the Indian and Pakistani rupee have a tendency to correlate - the Pakistani rupee (PKR), which had seen strong performances against the US dollar in the previous three months, also experienced a dip in value after the news broke. However, the Indian rupee (INR) has been a neglected currency pair, due to the fact that trading in INR by Indian citizens is restricted, as it risks furthering weakening of the currency, and increased reliance on the value of the US dollar and adding to RBI's shortage of USD reserves.

Despite their differences, the two countries currently trade over $2 billion annually - the World Bank report suggests this should be somewhere in the region of $37 billion - and there is wide potential for both countries. Any kind of struggle between the Indian government and its own bank doesn’t suggest this potential isn’t going to be filled anytime soon and Modi’s presence at the South Asian Association for Regional Cooperation (SAARC) summit might also be affected. It also puts into doubt any further development in social and trade projects like the Kartapur Corridor.

It’s clear that Patel’s resignation has come at an inconvenient time for the Indian government and there has already been a negative development for the market. But, that bad time, which includes forthcoming elections, might also halt any further development in trade between the two nations, which has only recently started to redress an import/export balance held strongly in India’s favour.

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