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Exclusives - 31 October, 2018

After CBI, now RBI is at loggerheads with the Centre over independence

Stocks and bonds of the country fell and the rupee weakened amid reports that RBI Governor Urjit Patel may resign due to breakdown in relations between the bank and the... #after-cbi-now-rbi-is-at-loggerheads

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Stocks and bonds of the country fell and the rupee weakened amid reports that RBI Governor Urjit Patel may resign due to breakdown in relations between the bank and the Union government. However, the RBI declined to comment. Given to media reports, the government had invoked never-before-used powers to issue directions to the central bank governor on matters of public interest.

The government on Wednesday stressed that the autonomy of the Reserve Bank of India (RBI) is ‘essential’ as it sought to calm investors worried about a growing public quarrel with the central bank.

The government, in a statement issued through the finance ministry, said the RBI’s independence was “an essential and accepted governance requirement. It would continue to carry out extensive consultations with the central bank to give its assessments on issues and suggest possible solutions.” But it was unclear if it had used powers for the first time under the RBI Act to give the bank instructions.

“The statement is ambiguous and does not fully clarify the issues at hand,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai. “Still it does sound like the finance ministry is trying to dial down the temperature.”

The Section 7 powers had been invoked by the government on issues ranging from liquidity for non-bank finance companies, to capital requirements for weak banks and lending to small and medium-sized companies.

Tensions between the RBI and the government mushroomed after RBI Deputy Governor Viral Acharya on October 26 accused the government of interfering with the working of the central bank. Acharya, while delivering the AD Shroff Memorial Lecture, said that undermining central bank independence could be ‘potentially catastrophic’. It is akin to committing a ‘self-goal’ by the government. His lecture was believed to be in sync with the views of Urjit Patel.

Acharya’s speech came after a long-running spat between the government and the RBI over whether the central bank should part with some of its 3.6 trillion rupees ($48.73 billion) of reserves to help fund the country’s fiscal deficit. He said the authority was pushing back against government pressure to relax its policies and reduce its powers ahead of the 2019 general election.

Investors are worried that a prolonged row between the government and the RBI could impact decision making at a time when India’s financial markets have been hit hard by a series of debt defaults by one of the largest infrastructure funding companies. That has led to a liquidity crunch in the entire non-banking finance sector.

When Raghuram Rajan exited the RBI governor’s office in September 2016 and Urjit Patel was elevated from the deputy governor’s position to the head of the central bank, it was thought that the government-RBI tussle would end. The belief was validated in November 2016 when the demonetisation was announced. RBI under Patel endorsed demonetisation.

Two years down the line, Patel’s defence of the government has apparently turned into defiance of the government. Patel was considered the government’s blue-eyed boy in the RBI as an answer to his rock star predecessor, who stonewalled all attempts of the government to get the bank regulator toe its line.

On the other hand, Union Finance Minister Arun Jaitely on October 30 blamed the RBI for failing to stop a lending spree during 2008-2014 that left banks with $150 billion of bad debt.

Government officials have also called for the RBI to relax strict lending rules for weak banks and are trying to trim the RBI’s regulatory powers by setting up a new payment regulator.

The NPA Trouble

The slugfest between the RBI and the government has come to the fore now but it had been brewing, at least, since February this year, when the central bank issued a non-negotiable bad loan notification. The RBI order reclassified NPAs and set new norms of loan restructuring.

A new 180-day deadline was set for declaring a loan as an NPA. It said that after 180 days, the stressed account must go to the bankruptcy courts for settlement. The government considered the new regulations as very harsh that left public sector banks in the red.

As of now, 11 out of 21 PSU banks are under the RBI watch-list. Two of them, Dena Bank and Allahabad Bank, are also facing restrictions on expansion of business.

Nirav Modi-PNB Scam

Around the same time, PNB fraud of nearly Rs 14,000 crore came to the light. Businessmen Nirav Modi and Mehul Choksi are accused of engineering the fraud involving several banks. The government openly criticised the RBI for the PNB scam.

The government said that the RBI was lax in supervising the banking operations that resulted in the PNB scam. The RBI governor, Urjit Patel, promptly junked the charge saying that the government shields the PSU banks. Patel sought more powers to oversee public sector banks. He said the RBI has more powers over the private sector banks.

Interest Rates

The government wants the RBI to cut interest rates. It considers this as a necessity to give the much needed impetus to the Indian economy. But the RBI has a different view on the matter.

Much to the chagrin of the government, the RBI has not only refused to bring down key interest rates but also raised them. The government believes that the central bank is pursuing a policy that goes against that of the finance ministry.

A similar tussle is being seen in the context of non-banking financial companies (NBFCs). The differences became more pronounced in the aftermath of the Infrastructure Leasing and Financial Services (IL&FS) crisis.

The government wanted the RBI to bail out the IL&FS as it defaulted on repayments. But the RBI refused to take the advice and toe the line. The RBI has also opposed the government’s persistent demand for greater dividend from banks.

Personality-based confrontations

Two incidents stand out. Nachiket Mor was removed from the RBI board two years ahead of his tenure. The RBI says that he was removed without tending to the courtesy of informing him.

Mor has been known as a strong critic of the government’s demand for higher dividend from the banks. The RBI leadership took the sacking of Mor as silencing of an opposing voice in the central bank.

Secondly, RSS-affiliate Swadeshi Jagran Manch’s co-convener S Gurumurthy was appointed as a director on the RBI board recently. Though, RBI did not oppose the government’s move but the top brass of the central bank is said to be uncomfortable with Gurumurthy’s appointment.

Gurumurthy was a bitter critic of the RBI under Raghuram Rajan. In one of the tweets, Gurumurthy said that the RBI had lost the capacity to think about Indian economy. He had also claimed to have given the demonetisation idea to the Modi government.

However, Patel and his deputy governors are expected to meet top finance ministry officials on Friday. TV channels said Patel has called for a full RBI board meeting on November 19.

(With inputs from agencies)

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