It is not the first time when the RBI & Government are having a hiccup in their long standing marriage. Though the rift between RBI & Government this time has escalated sharply due to multiple economic and political circumstances in the country. Public Sector Bank’s NPA laden balance sheet, IL&FS crisis, Liquidity crunch in the economy, the after effects of demonetisation and adaptability issues of GST norms for corporations have all led to the initiation of the blame game between the government and the RBI. RBI is protecting its Monetary Policy, while the government wants to spur growth in the economy.
Traditionally both these goals are extremes and achieving one would mean compromising the other.
Tensions arose so much so that the government thought it “might” consider invoking Section 7 of the RBI Act of 1934. Section 7, if invoked (which has never been invoked in India yet), allows the government to consult with and give instructions to the governor of RBI on certain issues that it believes are serious and in public interest.
India’s former chief statistician, Pronab Sen remarked that “The issues for which the government has started discussions under Section 7 of RBI Act are more operational rather than policy issues, and ideally, this section should not have been used because this section carries an implicit threat that if you don’t agree, we will issue a directive”.
WHAT IS THE FRICTION ABOUT?
Three main issues were raised in the recent meetings between RBI & the government:
1. Control over Public sector Banks: Post the Nirav Modi-PNB Scam the government blamed the RBI for not detecting such a big scam which happened under their supervision. RBI responded to this stating that they don’t monitor the banks till the retail branch level and also they do not have sufficient power to possibly have noticed this mishappening earlier. More so the RBI doesn’t have any power to appoint or remove any board member of PSB’s
2. Balance sheet strength: RBI every year pays dividend to the Indian government. The RBI made a dividend payout of Rs 30,659 crore for the fiscal ended June 2017, which was less than half of what it paid in the previous year (Rs 65,876 crore). In August 2018, the RBI decided to pay Rs.50000 crore as dividend to help the government to stick to its fiscal roadmap. Amidst this the Indian Government felt that the RBI should further transfer 3.6 lakh crore out of 9.5 lakh crore surplus reserves that RBI sits on.
3. Independent payment regulatory board set up: Initial talks for payment regulation were in the lines to set up payment regulation outside the purview of the RBI. But the reserve bank did not agree to this and issued a dissent note saying that the payment regulatory board has to be set up well within the realm of RBI.
4. Prompt Corrective Action (PCA) framework loosening: The government has asked the RBI to loosen their stringent norms for the PCA framework. Currently 11 of the 21 state owned banks are under PCA. Under PCA the banks cannot lend money which is drying up the circulation of money in various industries. The government has asked RBI to ease these PCA norms. Less stringent PCA norms will enhance the ability of banks to give out loans to MSME sector which will get the growth story rolling in India.
This constant tussle between the RBI & government is not a new phenomenon. It has occurred with many other countries as pointed out by Mr. Viral Acharya, Deputy Governor of the Reserve Bank of India.
2018: Turkey Government asked its central bank to not hike rates despite rising inflation. And thereafter the Turkish currency Lira crashed.
2010: The Argentinian government tried to settle some of its domestic debt by taking foreign exchange reserves from its central bank. Thereafter the governor resigned and Argentina plunged into a crisis.
India is still far from having any such detrimental effect because the government and RBI are planning to meet halfway across the road to shake hands and reach a mutual solution. And, hopefully, the government will never have to invoke Section 7 of RBI Act.
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Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of IndusGuru Network Partners
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