Rising Risks India

Banking regulation is never easy. Shifting regimes and tightening things up a bit during a rip-roaring global economy, however, makes it much less stressful. Among global banking systems, the one in India has lagged. Much of the rest of the world had moved on to higher capital requirements in addition to (sappy) liquidity constraints long ago so as to keep something like 2008 from happening again.

It has only served to demonstrate just how little regulators figured out about that supposedly long ago crisis in any one place let alone across the world. To catch up with fighting the last problem, the Reserve Bank of India alongside state banking authorities have been pushing banks to hold more capital. Until this year, that is.

Last month, under intense pressure from the government, India’s central bank relented before imposing the last part of higher capital requirements. These were strengthened in 2017 with every expectation counting on continuing the process, but the world in 2018 is very different.

The final level for the Capital Conservation Buffer (CCB), as it is called there, will now be pushed back to March 2020 at the earliest. The Modi government has become increasingly apoplectic about what it sees as unnecessary “tightening.” They have gone so far as to threaten to impose monetary policy on a central bank, RBI, that isn’t legally independent.

The dispute has now claimed not just regulatory relief but now one top official. If anyone at RBI wishes to lash out at foreign “dollar” tightening again it won’t be Governor Urjit Patel. Dr. Patel in June pleaded with the rest of the world to heed his country’s plight, only to have his words fall on deaf ears (as always). Writing in the Financial Times, he urged policymakers to consider what was going on with the real global reserve currency system (incorrectly blaming the Federal Reserve for it).

Despite caving on the CCB as well as a couple of other measures, Patel resigned earlier today. What’s really at issue is not rupees:

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