MUMBAI -- Reserve Bank of India Gov. Urjit Patel resigned on Monday, having presided over a clash with the government of Prime Minister Narendra Modi over easing credit for small businesses and cleaning up bad loans.
Patel leaves nearly one year ahead of the completion of his three-year tenure that began in September 2016.
"I have decided to step down from my current position effective immediately. It has been my privilege and honor to serve in the Reserve Bank of India in various capacities over the years," Patel said in a statement, citing "personal reasons" for his decision.
The rupee, already performing poorly this year, fell against the dollar after the announcement.
India Ratings principal economist Sunil Kumar Sinha called the development "disastrous," especially for the financial markets.
Goldman Sachs said in a note to investors that the resignation "will add to the near-term uncertainty in the markets," noting that no RBI governor had quit since the 1950s and Modi's government may have no immediate replacement.
The Wall Street bank sees a "risk that Indian assets underperform in the short term until a clearer picture of succession emerges."
Patel's departure comes as the RBI and government seemed to have reached a middle ground over contentious issues. The disagreements revolve around policies such as liquidity for nonbank financial companies, capital requirements for weak banks and lending to small and midsize businesses -- areas in which the RBI's actions have been at odds with the government's expectations.
The government wanted the RBI to make loans for small business cheaper and more easily available, in addition to providing liquidity to shadow banks, and easing restrictions on 11 state-run banks that are subject to RBI curbs on lending unless they improve profitability and asset quality.
The government has also been pushing the central bank to share bank reserves so it can spend on programs without affecting the fiscal deficit target.
Instead, the inflation-fighting RBI raised interest rates at its policy meetings in June and August, and changed its policy stance to "calibrated tightening" from "neutral" in October.
The central bank is independent of the government. But under Section 7 of the RBI Act, the government can intervene in monetary policy in order to protect the public interest. That New Delhi hinted at invoking this rule, which has never been used before, triggered resistance by the bank.
His departure reflects badly on a government that was roundly criticized for not appointing former Gov. Raghuram Rajan to a second term in September 2016. Rajan had fought hard to ensure transparency at the institution and retain its independence.
Patel's resignation follows weeks of speculation in local media, particularly after Deputy Gov. Viral Acharya commented on recent clashes between the government and the central bank.
"The risks of undermining the central bank's independence are potentially catastrophic, a self-goal of sorts [that] can trigger a crisis of confidence in the capital markets," he said in a public lecture on Oct. 26.
"The government's horizon of decision-making is rendered short, like the duration of a T20 match," he added, referring to the shortest format for the game of cricket.
"As elections approach, delivering on proclaimed manifestos of the past acquires urgency; where manifestos cannot be delivered upon, populist alternatives need to be arranged with immediacy," he said.
All this was said in the presence of the three other deputy governors and with the "support" of Patel.
Earlier this year, the RBI and the government clashed over a $2 billion fraud at state-owned Punjab National Bank. The government blamed the central bank for not exercising sufficient oversight as banking regulator. The RBI countered that it had not been granted enough authority to oversee state-sector lenders.
Akira Hayakawa in New Delhi contributed to this report.