Culpability of Urjit Patel

Urjit Patel

Reserve Bank of India is established on the bases of RBI Act, 1934 and subsequent amendments to it. The last was in 2016. It has many functions and its preamble specific mandates as:

“the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth”

When Demonetisation was announced on November 8th, 2016, there were many questions surrounding on who ordered and other known political questions. Curiously, an RTI revealed that the Reserve Bank of India ‘recommended’ demonetisation.

But curiously enough, it declined to disclose the deliberation of the minutes of the meeting citing it would ‘affect the sovereignty and integrity of India.’ Lets not put our national security at risk and demand it. But this cannot be one board meeting. There should have been a thorough economic analysis, which would obviously contain risk assessment and management.

Now that the Demonetisation results are out and all rational fact seekers realise that it’s a colossal failure, it is important to ask about the analysis which RBI did to recommend this disaster. Any decision can be a failure. We all know that. But what is required is not the final decision but the process which led to that decision. Here, RBI is not being transparent. Fail 1.

One of the economic analysis would involve the study of impact. What will be the impact on various economic factors, monetary factors etc? Only when it was completely convincing with a certain probability, a recommendation must have been provided. Now that the report is out, lets see how in various places it has passingly mentioned demonetisation and try to stich a cohesive picture on the impact.

“The MPC’s meeting of December 6 and 7, 2016 for the fifth bi-monthly monetary policy statement was overcast by heightened uncertainty around the outlook for growth and inflation in the aftermath of demonetisation. In the MPC’s view, short-run disruptions in economic activity in cash intensive sectors were likely to be transitory, given the war-time drive launched by the Reserve Bank to restore the pre-demonetisation stock of currency in circulation by ramping up the circulation of new currency notes…”

So, in its own words, it was uncertain about how it will affect growth and inflation. Read the Preamble that I quoted from RBI before. Its mandate is price stability keeping in mind growth. If the factors are external, we can say that no one can judge. But having recommended a move, shouldn’t they compare what they foresaw against what was happening on the ground? No. Fail 2.


The biggest treachery I attribute to Urjit Patel, because of him being the Governor of RBI, is knowingly letting down farmers and their income. RBI certainly knows that farming is cash sensitive and when 86% of cash is sucked out of the market, there will not be money with anyone and many agricultural commodities being perishable and many requiring urgent cash to continue their lives, demand-supply will take over and price will crash. Look what the report states.

“With the monsoon gaining momentum, however, inflation reversed into a declining trajectory beginning August 2016, which got accentuated by falling food prices, especially those of vegetables, in the wake of demonetisation in November 2016.

So, was this not expected? This cannot be unexpected. This injustice doesn’t end here. The report goes on to state:

“Second, anecdotal evidence pointed towards fire sales of perishables from November 2016 post demonetisation.”

Which central banker goes by anecdotal evidence? How do you even model or assign probability to anecdotal evidence? So in one place, it was ‘falling food prices’ and in another place it was ‘anecdotal’? Isn’t this inconsistency? This is completely consistent with Urjit Patel’s view.

In February MPC minutes, this is what he had to say.

“48. On the inflation outlook, transient factors, including anecdotal evidence on fire sales of perishables, have discoloured an objective assessment of inflation pressures in recent months.”

We may wonder what others thought about this in MPC.

Dr. Chetan Ghate – “While fire sales have led to vegetable prices collapsing, vegetables always have a seasonal rebound.”

Dr. Ravindra Dholakia – “The decline in overall CPI inflation is not reliably stable because it is mainly on account of vegetables and pulses coupled with the transitory impact of demonetisation.”

Dr. Michael Patra – “Vegetable prices may have been impacted by demonetisation, but they also exhibit strong seasonal behaviour and tend to turn up as the winter gets over.”

So our Governor is the only person using anecdotal evidence or in other words, hearsay for a decision. But I call this bias. Knowing cash sensitive sector will get affected, won’t he, in the interest of the nation send teams to enquire whether this is actually happening? Bias is even more pronounced because between February and August report release, he had ample time to change this but he chose not to. That shows callousness towards farmers. The cruelty doesn’t end there. The report goes on to further state:

“Both kharif and rabi seasons produced bumper harvests, aided by a normal monsoon after two consecutive years of drought-like conditions.”

“As stated earlier, distress sales of vegetables and other perishables following demonetisation accentuated the loss of momentum in food prices.”


  1. Urjit knew cash sensitive sectors will get affected but still went ahead recommending it crashing farm produce prices
  2. Urjit relied only on ‘anecdotal’ which is not expected from a Governor of RBI
  3. Urjit knew that there were two consecutive years of drought-like conditions and farmers were dying and this time monsoon is normal but still went ahead recommending demonetisation.

What does it say about a central banker who has prejudiced himself against a sector? This is wilful negligence.

But when it comes to farm loan waiver, there is a precise stand and one such is directly attributing moral hazard of this waiver.

“farmers may tend to factor in future credit constraints and reluctance of formal institutions to lend to them following waivers.”

So, he knowingly wrecked the income but attributed moral hazard discrediting honest farmers who are genuinely affected by vagaries of climate.

Others noteworthy misses:

The same report mentions “IIP Lower 2.6% from November 2016-March 2017 compared to April – Oct 2016.” Was this not envisaged? A correct number was not required but a figure with assumptions was expected. I wouldn’t call this a fail but a disappointment in lack of transparency.

“While growth is again expected to be consumption-led, continuing remonetisation should enable a pickup in discretionary consumer spending, especially in cash-intensive segments of the economy.” So what this means is that, even after 10 months of demonetisation, RBI is not sure and in the area of speculative statements. Of course, economy is the area of probability and not certainty. But with cash-intensive segments really remonetised, shouldn’t it be a certainty?

In final analysis, Urjit Patel:

  1. Has not been transparent in answering ‘why’ demonetisation was recommended
  2. Has not provided the cost-benefit analysis of the recommended move
  3. Has neither maintained price stability that is mandated
  4. Nor has kept the objective of growth in mind, which again is mandated
  5. Had wilfully wrecked farm income
  6. Has not provided final ‘total’ cost of demonetisation exercise
  7. Has not instituted a time bound, post facto cost-benefit analysis of his own recommendation
  8. Has reduced the institutional credibility by remaining silent

None of these pertain to the actual results of demonetisation, which is an abject failure.

RBI was created away from Finance Ministry only to have certain independence which can protect people of India from the whims of political masters.

By overseeing such a non-transparent, prejudiced and open-ended monetary shenanigan, Urjit Patel has no reason to continue as the Governor of the Reserve Bank of India.

By not standing up to his mandate to protect the citizens and serving a political ideology, he has lost his position as being a neutral caretaker of our currency.

By continuously living in denial about the disastrous effect of demonetisation, he has clouded his thoughts with complete bias, not of economic one but of political tinge.

“Possession of great power implies great responsibility.” And he has shrugged his responsibilities.

It is time that we seek accountability from the people in power.

It is time that we seek resignation of Urjit Patel.


P.S.: Urjit will be best served to keep in mind the rail board chairman who resigned for all the incompetence. He is dispensable to this regime and he can have his honour intact by offering to resign owning up for his failures.

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