Govt-RBI spat: Nov 19 meet may decide who is stronger
News analysis

Govt-RBI spat: Nov 19 meet may decide who is stronger

All eyes are on the November 19 meeting of the Reserve Bank of India (RBI) central board, the first after the Union Government-bank spat that has been on for the last few days.

Realising the danger, the Government decided not to escalate the issue further and came out with a statement acknowledging the relevance of the banking regulator’s autonomy. However it added that it should be within the framework of RBI Act.

To make matters worse, the statement said the Government frequently consulted RBI on important matters but never went public with those matters.

This was targeted at RBI Deputy Governor

Viral Acharya who a week ago publicly raised the issue of undermining the independence of the apex bank and warned of the consequences of this ‘potentially catastrophic’ move.

"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," he had said.

The Government has apparently been unhappy with certain stands of the RBI. These include the way the bank has stood for tighter liquidity, refusal to relax lending restrictions on some banks and ways to resolve bad loans in the power sector. To top it all, the Government proposes to have an independent payments regulator. This is seen as a move to trim the RBI's regulatory powers.

The bone of contention is Section 7 of the RBI Act, empowering the government to issue directions to the central bank. According to finance experts, never ever has been this invoked. There have been issues earlier too between the Government and the RBI like the infamous incident way back in the 50s when the then RBI Governor Rama Rau had to resign despite being the pet of the then Prime Minister Pandit Jawaharlal Nehru.

The tiff Rau had then was with Finance Minister TT Krishnamachari who when handling the Commerce portfolio earlier had picked issues with him. Though he wanted to relinquish his post Pandit Nehru forced him to stay on. But after becoming Finance Minister, Krishnamachari trained his guns directly on Rau. Finally, when even Nehru gave him up saying the Government decisions had cabinet approval and was above everything and Rau had to quit.

Governor Urjit Patel has seen an attack from the Rashtriya Swayamsevak Sangh (RSS) which said the RBI should work in sync with the Government. If that was not possible, Patel should quit to support economic growth or he should resign, said Ashwani Mahajan, chief of the RSS Swadeshi Jagran Manch, the economic wing of RSS. Incidentally, Mahajan is considered the “ideological mentor” of the BJP.

Analysts see the Government move aimed at seeking a share of the massive Rs 29 billion reserves. There is the stand that this should not be left idle but used ‘general welfare’, especially when elections are round the corner and huge funds would be needed.

According to the RBI, it was already paying huge amounts as dividends, though the Government would want more. However, the RBI is firm on not parting with a share of the reserves kept to meet exigencies in case there cropped up a financial crisis.

A clear picture of where things stand and whether Patel will bow out will emerge after the November 19 meeting.