By Prarthana Mitra
The friction between the Reserve Bank of India and the central government reached a simmering point when the bank employees association and officials from the Prime Minister’s Office expressed their opposing views regarding deputy chief Viral Acharya’s incendiary speech last week.
What did RBI’s deputy governor say
In an explosive speech on Friday, Dr. Acharya 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 “crisis of confidence in capital markets” and 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 said.
Response from the centre
Shared widely over social media with the fullest support from RBI officials, the speech seems to have gone down rather badly with government officials, who expressed fear that the country’s image before foreign investors may be tarnished.
“The government respects the autonomy and independence of the RBI but they must understand their responsibility,” an official said from PMO told Reuters Tuesday morning, after another derided the central bank for making the rift public.
Here’s where it started
The RBI board currently comprises 18 members including Financial Services Secretary Rajiv Kumar, Economic Affairs Secretary S.C. Garg and the four deputy governors of the bank.
At the board meeting on last Tuesday, October 23, only 3 out of 20 items on the agenda were discussed over eight hours without a conclusive decision on any of them. The meeting has reportedly been a marathon of muscle-flexing from some of the independent members of the board who were pushing the centre’s interests over real financial concerns.
Immediate cause of the rift
One of them was the prompt corrective action (PCA) framework of the banking regulator which determines lending restrictions based on their worsening capital, asset quality and profitability. If a bank breaches a particular threshold on any of these parameters, restrictions are imposed. So far, the RBI has barred 11 public sector banks from lending unless they shore up their capital base and get rid of massive bad debts.
Several board members 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%. RBI officials, however, argued that the non-performing asset provision norms for Indian banks are less stringent than what Basel proposes.
The central government and bank have been at odds for a while
Another set of norms which came under question were those pertaining to the RBI-mandated stressed asset classification, which too has been opposed by key board members. Under the new rule, banks must start resolution process if loan repayment is overdue even for a day.
Other contentious issues include RBI’s surplus transfer and inflation rates. While the government is not pleased with the RBI increasing interest rates, the central bank believes it should have sole authority in the matter and has even rejected the centre’s proposal to set up a separate Payments Regulatory Board.
Acharya, in his speech, highlighted these differences, arguing that the government must not be allowed to dilute RBI’s autonomy, especially at a time when the rupee is at its weakest, and another nodal institution, the CBI, is embroiled in dispute within and without. Key opposition Congress also applauded the deputy governor for taking a stand against the government after the demonetisation fiasco. The central government has refused to react or officially comment on what it describes as the RBI’s “unilateral aggression.”
Prarthana Mitra is a staff writer at Qrius.