Former Reserve Bank of India deputy governor Subir Gokarn paid a heavy price for resisting government pressure to cut policy rates, global brokerage CLSA has said. Mr Gokarn, in-charge of the monetary policy department, including interest rate, was not given an extension despite the backing of governor D. Subbarao, CLSA added.
"Under him, monetary policy guidance explicitly – correctly, in our view – flagged the need for fiscal correction to gain macro stability and contain inflation," CLSA's Rajeev Malik wrote in a note.
Mr Gokarn's three years term had ended in November 2012, but the government had given him one-month extension which expired on December 31, 2012. Urjit Patel, an adviser in the Boston Consulting Group, will be the new deputy governor.
"Technically, the government is within its rights for not extending (Mr) Gokarn’s term. But that is not the issue. The issue is why... It is also unclear why the replacement, with no real-time active policymaking experience was preferred to the incumbent," CLSA's Rajeev Malik wrote in a note.
The central bank is under immense pressure from the government to cut interest rates, but it has stood its ground, keeping rates on hold since April citing concerns about inflationary pressures.
India’s Reserve Bank is not legally independent but independence is conveyed by the personality of the governor and deputy governors who are appointed by the government.
"...the government’s policy incoherence and fiscal laxity that has made things difficult for the RBI’s fight against inflation. Mr Gokarn became the fall guy because of the handling of the rupee and for resisting calls for interest rate cuts by the government," CLSA said.
It is not clear if Mr Gokarn's exit will pave the way for rate cuts, but most economists expect the central bank to reduce rates by 100 basis points beginning January 29.