By Prarthana Mitra
For the first time in history, the central government has reportedly invoked Section 7 (1) of the Reserve Bank of India Act, empowering it to issue any directive to the central bank governor on matters of public interest. The first letter, according to Economic Times, wanted RBI to make exemptions for power companies; the second one pertained to using RBI’s capital reserves and the third letter has asked to relax lending constraints on PCA banks.
Sources, however, insist that the government has not taken any action and in fact, wishes to de-escalate the ongoing skirmish with RBI. The Centre has only initiated consultations with the central bank on unresolved issues, according to some officials close to the matter.
Developments in the RBI-centre rift
In a first official response from the government to the friction brewing between the centre and RBI, the Finance Ministry tweeted that the autonomy of the RBI within the framework of the RBI Act was an essential and accepted governance requirement.
Autonomy for Central Bank, within the Framework of the RBI Act, is an Essential and Accepted Governance Requirement: Says Government ; For full details, please log on to: https://t.co/lqjjoH9pOb
— Ministry of Finance (@FinMinIndia) October 31, 2018
Former finance minister Yashwant Sinha, now a vocal critic of the government, immediately urged RBI governor Urjit Patel to resign in protest, if the government has indeed issued never-used-before directives for the central bank to fall in line with their demands.
This comes in the wake of deputy governor Viral Acharya’s explosive speech in Mumbai last week, where he warned the government against undermining the central bank’s autonomy, and further asked the centre to abstain from rash financial policies lest it triggers a “catastrophe.”
“Governments that do not respect central bank independence will sooner or later incur the wrath of
financial markets, ignite economic fire, and come to rue the day they undermined an important
regulatory institution; their wiser counterparts who invest in central bank independence will enjoy
lower costs of borrowing, the love of international investors, and longer life spans,” Acharya had
S Gurumurthy, recently nominated to the RBI board by the government, reportedly complained to Urjit Patel about Acharya’s publicising of the rift.
While previous attempts to take way debt management functions from the central bank have led to friction before, this time it is different. According to The Hindu, the government’s intervention through the board has everyone on high alert.
Back in September, board member Nachiket Mor’s term was abruptly terminated by the government – an unprecedented move in RBI’s history, according to some. While Mor was vocally opposed to regulation and higher surplus transfer, with the nomination of right-wing thinkers like Gurumurthy, the last board meeting ended inconclusively over issues such as stressed asset classification, inflation rates, surplus transfer and lending restrictions under the PCA framework.
Several board members, including Gurumurthy, seemed to be in favour of diluting the risk threshold on the Indian banks identified by the PCA. Arguing that capital norms for Indian banks are unnecessarily more stringent
than what the Basel norms prescribe, they want to lower the capital adequacy ratio from 9% to 8%.
This is corroborated by the All India Reserve Bank Association, who stated that the deputy governor has spoken more “in disgust and despondency” due to continuous nibbling by the government and the finance ministry. ”This is…not a sudden outburst, but was waiting to happen due to long-simmering discontent,” the association said.
Prarthana Mitra is a staff writer at Qrius
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