FxWirePro: Rupee weakens amid speculation over RBI governor’s resignation

After weakening since Monday, the Indian Rupee sharply weakened on Wednesday as the worsening relationship between the government and the Reserve Bank of India (RBI) led to rampant speculation that the current governor of RBI, Urjit Patel is set to announce his resignation today.

The rift between the RBI and the finance ministry of India has been widening since the beginning of the year over the central bank’s tough stance on bad loans on Indian banks’ balance sheets. It took a turn for the worse in October, when October 26th, when RBI Deputy Governor Viral Acharya hinted that the government's interference in the central bank's operations was rising and that there was a need for autonomy. Acharya also added that if the central bank’s autonomy is not respected it would soon ignite the wrath of the financial markets and ignite an economic fire. This was the harshest criticism of the government by any central bank official.

The government has been unhappy with RBI's decisions regarding interest rates. It also disagreed with RBI's February directive on the classification of non-performing assets (NPAs) and norms of loan restructuring, believing them to be harsh. The center is also unhappy with the lending restrictions the central bank has imposed on NPA-laden financial institutions. RBI has also been against the government’s desire to use RBI reserves to boost the economic growth at a time when under-prepared implementation of ‘goods and services tax’ along with demonetization have led to an economic slowdown.

The ousting of Mr. Patel would be perceived very negatively by the financial markets after the previous well-reputed governor Raghuram Rajan was ousted against his will just after one term.

Indian rupee after strengthening to as high as 73.1 per USD, has declined sharply over the last three days. Currently trading at 73.96 per USD.