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Centre vs RBI: What is the way ahead?

All eyes are on the November 19 board meeting of the RBI, when the government nominees are bound to press for the need for an ‘economic framework’ for the bank.

 |  4-minute read |   13-11-2018
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The past two weeks had seen an unprecedented public war of words between Reserve Bank of India (RBI) and the government, as differences between the two over key economic issues reached a climactic point.

But will this lead to the resignation of Urjit Patel, the RBI governor, as some would like to speculate?

Or, will both the sides bury the hatchet in the name of public good and carry on with their individual businesses?

If RBI sources are to be believed, there is no likelihood of a further escalation in the tensions between the two, at least for now.

What really irked the RBI was not the government’s disagreement on a range of topics — the rigid prompt corrective action (PCA) norms put forward by the RBI, this February, that prevented 11 public sector banks to lend further until their health, hit by huge bad loan pile, got better; the question of a separate regulation for payment banks, which the RBI is opposed to; a separate window for financing non-banking financial companies (NBFCs), which, again, the RBI is not too keen about; and the question of transferring the central bank reserves to the government when it needs the most —in an election year.

urjit-inside_111318052640.jpgThe tension will not escalate any more, as of now. (Photo: India Today)

What rubbed the RBI the wrong way was the manner in which these issues were raised with it, by sending across letters of consultation under Section 7.

Technically, Section 7 was not invoked by the government on the RBI, but these so-called consultations were seen as a veiled threat that the government would not mind overriding RBI’s decisions citing issues of ‘public interest’ in case the central bank had no inclination to agree with the government.

That was what prompted RBI deputy governor, Viral Acharya, to come out with his tirade against the government when he batted for the central bank’s autonomy and cautioned that any government that interfered with the bank’s functioning would face the ‘wrath of the markets’.

But at the same time, officials at the RBI also accept that the government is the final authority in policy matters, and the general feeling is that rather than take things to the level of brinkmanship, the RBI would budge on issues, after putting across its dissent in writing.

RBI would like to stick to its stance that the strict NPA (non-performing assets) norms were the result of a failure of some of the earlier schemes to control bad loans, and the need for it to drive home the point that banks need to recognise the bad loans problem from day one of the default. It also says the PCA norms were framed after consulting the government, and it really takes eight to 12 quarters for a bank to emerge healthier after it comes under the PCA framework.

AS far as payment banks go, the RBI feels that payments are a subset of currency itself, and therefore, need to be regulated solely by the central bank.

That the RBI is not in favour of transferring its reserves to the government is clear from the analogy of Argentina’s central bank, with which Acharya started off his speech.

Summing up the country’s poor state of affairs on the economic front, Martin Redrado, Argentina’s central bank chief, said in a January 2010 news conference, “We have arrived at this situation because of the national government’s permanent trampling of institutions... Basically, I am defending two main concepts: the independence of the central bank in our decision-making process and that the reserves should be used for monetary and financial stability.”

All eyes are on the November 19 board meeting of the RBI, when the government nominees are bound to press for the need for an ‘economic framework’ for the bank, which would cap the amount of reserves that it needs to keep with itself.

Raghuram Rajan, the former RBI governor, has already said that the board’s role should only be an advisory one, and not be used to supercede the powers of the RBI.

Unless the discussions at the board meeting go really out of hand, Patel may not opt for an early exit from his post and continue till his term ends in September 2019.

(Courtesy of Mail Today)

Also Read: RBI Vs Modi govt: What we know about the public spat so far

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Writer

MG Arun MG Arun @mgarun1

The writer is Deputy Editor, India Today.

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