There have been so many stories around the whole Urjit Patel episode that I figured the only way to make sense of it is to divide all the viewpoints into three broad categories.
What follows is a fictitious conversation between three people with their own thinking styles.
It is amazing to see how they process every new information they get using their predominant thinking style. I am sure you would relate to a lot of this.
Tribal Tanu: I am a big supporter of this current Government. I don't think Urjit was doing a good job. His exit could actually be a boon in disguise.
Moral Manu: It is utterly, totally wrong that a Governor had to resign mid-way through his term. It was totally immoral on the part of the Government to put so much pressure on him where all he was doing was discharging his duty to the best of his abilities.
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Conceptual Kanu: Hmm... What happened is bad. But our institution builders always foresaw that such difference of opinions could arise and therefore created strong institutional framework. So while the foundations of these institutions may shake from time to time, the overall structure will continue to remain as strong as ever.
Tribal Tanu: Yes Kanu. I think this is a lot of hype about nothing. It is as if such things are happening for the first time. Previous dispensations have been guilty of doing worse things. Don't forget, this Government has the best interests of people at heart. And I don't think they were asking for too much from the RBI.
Moral Manu: What seems to have hurt this Government is the sudden resistance from the Governor. When he maintained a stoic silence during the whole demonetisation episode, he was hailed a hero. And now that he has developed a mind of his own and is not afraid to ask questions of the Government over their demands, an environment has been created to ensure his exit.
Tanu, Manu aur Kanu ki Baatein
Conceptual Kanu: On Demonetisation, the short impact has certainly been negative. Economic growth had fallen off sharply post demonetisation. However, some experts say it will usher in a long-term mindset change which will be good for the economy.
On the other points, there is no denying that the Government will get desperate to get the economic engine running, especially in an election year and was therefore asking the RBI for some unusual favors. RBI on the other hand, was right in denying the Government these favors as it felt these could have negative repercussions in the long term.
Tribal Tanu: I agree that RBI has to have autonomy. But it has to be exercised within the framework of the law. What was wrong in the Government's claim that the surplus funds that the RBI has can be used for poverty alleviation. After all, it is the extra money lying in the bank's coffers and will be used to benefit the citizens of its own country.
Moral Manu: But where does this stop. If the Government keeps nibbling at RBI's autonomy, sooner or later, there will be no autonomy left. RBI will eventually become a puppet at the hands of the Government and may soon incur the wrath of the financial markets.
Conceptual Kanu: Even if that is possible, I think the chances of that happening are pretty low. For we have survived numerous such spats in the past and the RBI has remained a proud, autonomous institution.
The beauty of a democracy like ours is that we have plenty of checks and balance in place. And while there may have been a huge trust deficit created between the RBI and the Government with Urjit Patel's resignation, I think we will overcome this as well and keep chugging along the path to long term prosperity.
One last thing, the markets may over react to this news. They may get emotional like the Tribal Tanu or the Moral Manu. But rationality dictates that we have a system that works and our economy is resilient enough. Which is why a significant correction in stocks could be a good opportunity to buy a slice of India's economic future at attractive prices.
Rahul Shah (Research Analyst)
Editor, Profit Hunter
PS: Tanushree Banerjee is Equitymaster's co-head of research and editor of StockSelect. She has a long and illustrious track record of picking safe stocks. For over 16 years, StockSelect subscribers have received safe stock recommendations that delivered double and triple digit gains. You can receive Tanushree's safe stock recommendations by signing up here.
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