Govt & RBI

Friends you must have read about the conflict brewing between Reserve Bank of India  (RBI)and NDA Govt for  last few days. The conflict became open when Deputy Governor of RBI Viral Acharya spoke in a meeting-    “Govts that do not respect Central bank of the country (in India it is RBI) and its 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.”

Days after this uncalled remark, there were reports that govt was planning to exercise never-before used powers that would allow it to give directions required in the public interest to the RBI.

The first point of conflict is that the govt reportedly wants the RBI to allow ailing  state owned banks,suffering under dead loans to industries, to resume lending to small businesses. It also wants the regulatory bank RBI to lower interest rates to inject much needed liquidity into the economy.

The second point of conflict is that the govt plans to set up a separate regulator to look after digital payments. In the recent past, the govt has appointed a controversial right wing accountant to the RBI board and cut short the tenure of another board member on the grounds of conflict of interest. Finance minister Arun Jaitley made a statement, not to the liking of RBI, when he accused the RBI for looking the other way, while banks were lending indiscriminately some years ago. (referring to UPA rule).

RBI Governor Urjit Patel indirectly hit back at Jaitley’s remark and said ” There has been tendency in the pronouncements post revelation of the fraud that RBI supervision team should have caught it. While that can  always be said ex post with any fraud, it is simply infeasible far a banking regulator to be in every nook and corner of the banking activity to rule out frauds by being there. If a regulator could achieve such an outcome, it would effectively imply that that regulator can do any thing that banks can do.”

But the main source of conflict appears to be over the govt’s attempts at raiding RBI reserves. a strong hint of this issue came during   Viral Acharya’s  above mentioned speech, where he spoke about “the resignation of Argentina’s Cental Bank Boss in 2010 after the President signed the decree firing him for refusing to use currency reserves to pay foreign debt. Martin Redardo, the Centail Bank Boss had angered the President after he rejected President’s order to transfer $ 6.6 billion to a govt fund to pay foreign debts and fix a hole in budget.” That time , while rejecting the order he had said ” I am defending two main concepts: the independence of central Bank in our decision making process and that the reserves should be used for monetary and financial stability.” While quoting this incident of Argentina, what actually Viral Achraya was indicting that same situation might occur in India also.

Now the question is whether Modi govt is trying to raid the RBI’s Rupee currency reserves.

With the General elections approaching next 6 months, experts think that Govt will try to lift and stimulate the economy with a big public sector spending to attract voters. Govt has launched an ambitious health insurance plan for the poorest, which will cost Govt about Rs 2100 Cr in its first year alone, and eventually cost 4 times every year. The fact is govt has little surplus in this fiscal year for this work.

There were strong rumours floating in the market few days back that Urijt Patel may have to resign from the post of Governor of RBI and if this happens, it will be first time a serving RBI governor leaves his job mid way through his 5 years term.

The experts say, that it has really a problematic situation, if the RBI chief quits, then the confidence of markets will be shaken, and the investors might start withdrawing money from of India. It is not uncommon for govts to clash with Central banks of their country. Few months back US President attacked the US Federal Reserve, saying it posed the biggest risk to the US economy for raising interest rates too quickly.  In the past few years the Chief of Central Banks of Argentina and Ukraine  had to quit because of differences with the govt.

There is another view: The RBI has excess reserve, which it should handover to govt, to which the reserves belong. Secondly the RBI’s management has not been subjected to proper accountability, despite obvious failures, and therefore the RBI’s board needs to play more active  and positive role.

Although India’s $ 2.6 trillion economy has recently boosted by by a strong performance in consumer spending and manufacturing. Due to Rupee falling against dollar and high oil price with trade  deficit and inflation, and commodity prices are still the major concern for the govt.

Let us hope that RBI team and Govt resolve all their differences in the next board meeting, which is schedule to happen today.

Awaiting your comments/feed backs/ views on this blog.

Anil Malik

Mumbai, India

19th Nov 2018