Government, RBI may smoke peace pipe

The assorted technocrats, economists and bureaucrats had fundamental disagreements during a stormy meeting held 27 days ago, which stretched beyond nine hours and ended inconclusively. 

Published: 19th November 2018 04:09 AM  |   Last Updated: 19th November 2018 08:43 AM   |  A+A-


Image for representational purpose only (File | Reuters)

Express News Service

The faceoff between the Reserve Bank of India and the government might end — at least for now — with board members, including government nominees, expected to reach a consensus on Monday. Such a move also eliminates the need for invoking Section 7, of the RBI Act, 1934. Both sides, sources said, could find a middle ground on controversial issues, including the transfer of surplus reserves, for which a technical committee will be appointed and a resolution could be passed. 

“On the economic capital framework, we hope to get everybody to agree to appoint a technical committee,” sources told The New Indian Express. The move can prevent the public brawl from getting murkier and divert the attention on RBI — accused of hoarding surplus — while the latter, clearly indicated that raiding its rainy day funds, however mighty they are, is harmful.

ALSO READ: Signs of RBI’s exasperation and frustration pervade ongoing tussle 

Appointing a committee will reform RBI’s surplus distribution policy, but it pertains to future provisions and profit transfers. It will thus be interesting to see how the government will persuade the central bank to part with existing excess, a significant part of which was acquired at an average Rs 45 per dollar. It is also unclear if the proposed committee will recommend RBI to part with existing surplus.

Sources said the capital framework is over 25 years old is up for review as the government believes RBI’s provisions are way too high. “We are determined to keep the temperature down... there’s an understanding.”

Meanwhile, of the 12 items on the agenda, the board hopes to find consensus on at least four-five issues including bank credit to MSMEs, and relaxing PCA norms. “There are some solutions that can be found and for others, we may appoint experts,” he explained adding, “We should find at least three areas of agreement.”

ALSO READ: If we are to improve gowth rate, we need certain level of credit, says Arun Jaitley ahead of RBI meet

At 10 am Monday, the RBI board will begin the day’s proceedings in earnest. It’s a history-altering meeting, but the 18 wise members will probably sit uneasily alongside as they confront choices between autonomy and accountability, responsibility and regulation, and independence and the institution’s performance. 

The assorted technocrats, economists and bureaucrats had fundamental disagreements during a stormy meeting held 27 days ago, which stretched beyond nine hours and ended inconclusively. 

The war of words that followed saw much bad blood, widening the gulf between Mint Street and the North block, and risking the credibility of RBI, even as economists and commentators re-grouped  — a la Freshwater monetarists vs Saltwater economists in the US championing opposing economic theories — to choose between right and wrong. The ongoing standoff also sparked off wild speculation that the government called for Governor Urjit Patel’s head, reducing all crucial issues as relative trifle. 

It all started with the manifestation of the government’s accumulated concerns, prompting it to wage a war by stealth on the central bank, and threatening to invoke Section 7 of the RBI Act, 1934. Still, the closed and cosseted institution that it is, the RBI refused to accept the bureaucratic wheeze and surprisingly opted for rule-breaking, with Deputy Governor Viral Acharya calling the government out in the open. A public spat played out, where wisdom and maturity should have prevailed, if not leading to a constructive dialogue or a lively debate. Experts say it’s important not to repeat the same mistake and yet expect a different outcome at Monday’s meeting. 

Section 7 of the RBI Act allows the government to “give such directions to the RBI as it may, after consultation with the governor of the Bank, considered necessary in the public interest”. The government is said to have sent three such missives seeking relaxations under PCA norms, on the February 12 circular, and on bank lending to MSMEs, who got choked as the IL&FS crisis precipitated a liquidity squeeze. Several bank chiefs informally concede the high-handedness of RBI’s stringent norms mandating one-day loan defaults as NPAs, while others question the government’s ‘conflict of interest’ as it owns both public sector banks and RBI – the handmaiden of government’s finance — pressing the need to separate both regulation and banking as independent authorities.

Then there are critical issues about RBI’s regulatory actions, which are viewed as arbitrary. Perhaps, it’s about time to raise the bar of transparency and accountability, abandoning in bits, if not at one go, the central bank’s obsession with secrecy. Finally, at the heart of the tussle is the `9.6 lakh crore surplus, which all agree is the highest among all central banks. One may cite the government’s demand for profit transfer as ‘for the good of the country,’ but in reality, it may be eyeing reserves that can be used to plumb the fiscal deficit in order not to push back the date by when public finances will be back in the black. 

Though the government later clarified that its fiscal math is on track, the request for reserves continues. Unsolicited advice poured in on why raiding RBI’s balance sheet should be avoided, while some accused the central bank of hoarding a surplus. However, few ponder over the need for a guide on how to stack up and use those almighty reserves. Most central banks provide for a specified percentage of profits to be transferred to reserves before dividends are paid. For instance, in France, it’s 5 per cent of net profits, while in Russia and Indonesia, it’s 25 and 30 per cent. India has no such internal benchmark, be it for contingency or revaluation reserves.

All said, RBI’s autonomy is caged within the framework of the RBI Act, 1934 as several previous Governors have observed while fighting against governments to protect its autonomy. While the unfolding drama is extraordinary any way you slice it, the Board, which includes government nominees, should act wisely to get it right for posterity.

Who said what

RBI Deputy governor Viral Acharya

Governments that do not respect a central bank’s independence sooner or later incur the wrath of financial markets.

Subhash Chandra Garg, DEA

Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4 per cent during the week and bond yields below 7.8 per cent. Wrath of the markets? Lot of misinformed speculation is going around in media. Government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer 3.6 or 1 lakh crore, as speculated. 

Former RBI Governor Raghuram Rajan (to a channel)

The RBI is something like a seat belt. As a driver, the driver being the government, it has the possibility of not putting on a seat belt. But, of course, if you do not put on your seat belt you get into an accident and the accident can be quite severe.

Congress president Rahul Gandhi

Rs36,00,00,00,00,000. That’s how much the PM needs from the RBI to fix the mess his genius economic theories have created. Stand up to him Mr Patel. Protect the nation. 

Industrialist Rahul Bajaj

If the government wants to stick (to its guns), then the matter will heat up. If RBI or Urijit Patel also sticks (to his own stand), and if government invokes Section 7, then it means, according to me, Patel has to resign...The point is he (Patel) has shown some spine at last. It was not there earlier.


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