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

The Centre has reportedly invoked powers under Section 7 of the RBI Act to issue directions to the central bank on matters of public interest.

 |  4-minute read |   31-10-2018
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The ongoing spat between the Reserve Bank of India and the government has suddenly jolted all Indians out of their post-demonetisation slumber. It doesn't matter whether we understand economy and matters related to it or not, but the public spat has opened our eyes to a different kind of reality.

According to media reports, the government has apparently invoked powers under Section 7 of the Reserve Bank of India Act to issue directions to the RBI on matters of public interest. Now, we are told, this is a big deal.

Why?

Because this power has never been used before.

urijit-patel-arun-ja_103118040748.jpgGoing separate ways? There are whispers that RBI governor Urjit Patel may consider resigning from his post. (Credit: PTI file) 

This development has given an interesting twist to the skirmish between the RBI and the government that recently spilled into the public domain after deputy governor Viral Acharya said that "undermining the RBI's independence could be potentially catastrophic”. Acharya's statement was enough to set tongues wagging that the RBI is apparently pushing back against government pressure to relax its policies and reduce its powers ahead of the Lok Sabha elections in 2019.

Invoking powers under Section 7 of the RBI Act, the Centre has reportedly sent separate letters to the RBI governor recently on "issues ranging from liquidity for NBFCs, capital requirement for weak banks and lending to SMEs".

There are whispers that this move could have triggered last week’s public assertion by Acharya.

As expected, the latest revelations have scandalised a section of economic experts, raising questions about the government’s intentions and the impact on the RBI’s autonomy.

This is certainly not the first time that there has been a difference of opinion between the central bank and the Centre. There have been differences before too — but nothing of the kind of public spectacle we are witnessing now.

This time around, the bone of contention between the two is that the government reportedly wants the RBI to relax lending restrictions by weak banks, open a special liquidity window for non-bank financial companies (NBFCs) and be lenient on loans to micro, small and medium enterprises (MSMEs). The Centre reportedly also wants the RBI to part with some of its reserves, which the government considers excessive, or increase its dividend to the government.

If lay persons don't understand economy, they find it more difficult to crack the enigma called Arun Jaitley — the Finance Minister had earlier blamed the central bank for “looking the other way” as banks lent recklessly during the UPA government. Now, the government wants banks to unleash lending to push growth.

Many are questioning what could be prompting the government to even think of invoking these powers now. They are insistent that India is not in a crisis or emergency situation. Even the liquidity crunch in NBFCs is unlikely to become "India’s mini-Lehman Brothers moment" as forecasted earlier.

modi-jaitley_103118040948.jpgAll's well: Many say the NDA government's economic record shines bright only in comparison to the dismal record of UPA 2.  (Credit: PTI file) 

Adding to the chaos, now there are rumours that RBI governor Urjit Patel may consider resigning from his post. His critics suggest Patel did not inspire much confidence in the common citizen during the days of demonetisation. So, in a way, the common person doesn't care much about his resignation; however, the rumours did spark a sell-off in the rupee and bonds market.

If Patel does resign, his will be the fourth such high-profile departure after Raghuram Rajan, Arvind Panagariya and Arvind Subramanian.

Also read: Urjit Patel: Five things you need to know about new RBI governor

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