India's central bank chief Urjit Patel's shock resignation caused the rupee to shed value on Tuesday. 

Patel stepped down on Monday amid a huge spat between the Reserve Bank of India (RBI) and Prime Minister Narendra Modi's government over perceived interference in the bank's policy. 

He cited "personal reasons" for his decision but experts and Indian media reports have pointed instead to his apparent frustration with attempts from the government, led by Modi's Bharatiya Janata Party (BJP), to assert influence over the central bank.

The currency dropped more than one per cent to 72.19 to the dollar, while the benchmark Sensex in Mumbai slid 1.47 per cent almost immediately after the opening bell rang, before paring its losses later in the day.

Central bank 'under attack'?

Analysts say Patel's uncommon resignation is a sign the autonomy of the RBI is under threat. 

The bank's Deputy Governor Viral Acharya gave a speech in October warning the government that undermining the bank's independence could be "potentially catastrophic." 

Indian business newspapers reported at the time New Delhi had invoked never-before-used powers to write to Patel three times, urging him to change policy. 

Read more: What are India's currency woes?

"This is a clear signal of an eminent institution being attacked and its independence being chipped away one step at a time by the government," independent economist Ashutosh Datar told AFP. "It is obvious Patel resigned because he faced a lot of pressure on issues such as bad loans, shadow banking, and the central bank's independence."

Government vs RBI 

Modi's government is believed to be unhappy with the RBI's response to the rupee's sliding value. It has been one of the worst performing currencies in Asia this year.

As a fix, the government wants the central bank to lower interest rates and free up more of its cash reserves to invest in India's economy. 

It has also been pushing for the RBI to ease lending norms after IL&FS, a so-called "shadow bank" responsible for huge infrastructure investment, nearly collapsed. 

Read more: Was India's demonetization a failure?

But the RBI is reluctant to change lending limits, instead focusing on a massive bad loans crisis. 

An eye on elections 

Analysts say the government was keen to boost investment ahead of next year's general election, in which Modi will run for a second term. 

His BJP party is under pressure after preliminary counts in regional elections in key heartland states — Chhattisgarh, Madhya Pradesh and Rajasthan — pointed to a tight race or even wins for the left-of-center Congress party. 

"As the three erstwhile BJP states have a large agrarian population, the BJP's drubbing could be interpreted to mean that farm unrest is real," financial holding company Nomura said in a research note ahead of the local votes. "A rout of the BJP on its homeground states should encourage cohesion among the opposition parties to strengthen the non-BJP coalition for the general elections."

However, opposition parties still face a tough task to overcome Modi's high personal popularity ratings. 

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am/msh (AFP, Reuters)