MUMBAI -- Reserve Bank of India Gov. Urjit Patel's abrupt resignation leaves Prime Minister Narendra Modi with the decision of whether to risk alienating investors by continuing to press the central bank for looser monetary policy.
His departure, seen by some as a statement of dissent, comes as the Indian economy shows signs of slowing ahead of next year's general election -- a test of voter confidence in Modinomics.
Patel, a man of few words, kept to his style when announcing his resignation Monday evening.
In a statement of less than 100 words, he thanked the central bank's staff, management and board, but did not mention Modi's government. Patel cited "personal reasons" for his departure, but the timing said it all.
The prime minister praised Patel as a "thorough professional with impeccable integrity."
"We will miss him immensely," Modi tweeted. "Urjit Patel is an economist of a very high calibre with a deep and insightful understanding of macro-economic issues. He steered the banking system from chaos to order and ensured discipline. Under his leadership, the RBI brought financial stability."
Patel was once a favorite of Modi and his Bharatiya Janata Party's Hindu nationalist ideological parent, Rashtriya Swayamsevak Sangh.
The economist was expected to toe the government line as RBI governor, especially after the handling of the removal of high-value banknotes from circulation in November 2016, shortly after Patel took charge of the central bank. But differences soon emerged.
His resignation comes ahead of an RBI board meeting Friday. Patel apparently disagreed with decisions being made by the committees formed at last month's board meeting to investigate issues related to lending restrictions at weak banks and the central bank's surplus reserves, as well as increasing the liquidity to India's shadow banks after the Infrastructure Leasing & Financial Services payment default that threatened a systemic crisis.
Japan's Nomurasays the central bank's next policy meeting will involve governance reform, encompassing the level of engagement between the RBI and its central board as well as the functioning of the board's subcommittees.
"We think both the RBI and the government are right on various issues, but the sudden resignation will lead to questions about whether the government is trying to stifle institutions and whether the resignation is a statement to protect the RBI's independence," the brokerage said in a note. "This, along with the lack of policy coordination between the RBI and the government, will mean higher India risk premium, at least in the short term, in an environment where domestic political uncertainty is anyway on the rise owing to the elections" next year.
Last month's marathon nine-hour meeting attended by all 18 board members included a decision to form an expert committee to examine the RBI's economic capital framework.
This framework governs the bank's capital requirements and transfers of surplus reserves to the government. The board also asked the central bank to consider a scheme for restructuring the stressed assets of small and midsize businesses with up to 250 million rupees ($3.49 million) in aggregate loans.
Though the government and central bank seemed to have reached a truce, New Delhi clearly held the upper hand, with a sense that pressure on the RBI was not removed.
Patel's resignation "signals that the government has come out on top in its dispute with the central bank, but at the cost of undermining the RBI's credibility and its inflation-fighting credentials," Capital Economics said in a note. "In each aspect of their dispute, the government has been pushing the RBI to take steps that would boost aggregate demand despite core inflation being well above target."
"The most worrying scenario for investors would be if the government appointed someone from the finance ministry," the note said. "But with two successive governors bowing out under pressure from the government, whoever comes next will have their work cut out to convince markets and investors that the RBI is focused on stabilizing inflation close to target."
The resignation also comes one day ahead of both the critical counting of votes in five states and the start of the Indian parliament's winter session. The stock market, already nervous as exit polls show weakness in the ruling Bharatiya Janata Party, may react sharply on Tuesday when it opens to the news of Patel's resignation.
Opposition parties, already targeting Modi ahead of next year's election, are prepared to make an issue of Patel's resignation in parliament, a senior opposition leader said.
"As a gentleman economist, he had to tender his resignation because he is not comfortable to work in the environment under the present ... government," Veerappa Moily, head of the Parliamentary Standing Committee on Finance and a senior Indian National Congress party leader, told the Nikkei Asian Review. "Most unfortunate that they are demolishing one institution after another. They also wanted to encroach upon the autonomy of the Supreme Court, and now they have come to the RBI."
Modi's government also faces a slowing economy, jobless growth and a widening trade deficit, while taking criticism for its controversial revision of GDP data covering the previous government's term.
The revised data shows India's economic growth at an average of 6.7% during the last government, compared with 7.3% under Modi. Many argue that revising the gross domestic product figures is a political move ahead of the elections, and have questioned the reliability of the statistics.