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Since February this year, relationship between RBI and Union government was running unwell when RBI increased Interest rate increases on non-performing loans, to the defiance on liquidity measures for non-banking finance companies. On December 10 it reaches on nadir point and RBI Governor Urjit Patel quits. It is being alleged that that Patel did not open with bankers, industry captains and market participants. It made matters worse between the fiscal and monetary authority. Such incident had happened earlier too when a RBI governor had resinged while infighting with finance minister.
The rift escalated as Mint Road felt that North Block slighted it on issues such as liquidity management following the NBFC crisis, rules for weak banks, disclosure norms for defaults which are essentially the remit of any central bank. Economic affairs secretary Subhash Chandra Garg’s suggestion for setting up an independent payment regulatory board further undermined the central bank’s role, experts said.
However, rift between governments and central banks is nothing unusual. It is not just in India, but central banks across the globe, including the US Federal Reserve, seem to be getting drawn into conflict with the administration.
Argentina’s central bank head Martin Redrado stepped down in 2010, protesting against the Latin American government’s “permanent trampling of institutions”.
On Monday, Patel became the second RBI governor to resign; the first being Benegal Rama Rau who had resigned in the fifties during the Nehru government because of differences with the then finance minister TTK Krishnamachari.
“On account of personal reasons, I have decided to step down from my current position effective immediately,” Patel said in his resignation letter.
But the fact is he was under immense pressure ever since the talk of imposition of Section 7 rule under RBI Act doing the rounds amid the growing conflict. The provision empowers the government to issue directions to the RBI.
In his tenure, Patel had cut repo rate once in October 2016, but then raised it thrice by equal 25 bps dose each time since August 2017 to 6.5%, much against
the government’s wishes which had been seeking easy money flow to revive the economy.
India’s first quarter GDP grew 8.2%, but economists said it was on a low base while the second quarter GDP grew by a lower 7.1%.
The uneasy relationship aggravated with the government demanding higher dividend from the RBI and questioning the need to keep excess reserves for contingency. Former Chief Economic Advisor Arvind Subramanian advocated that this excess reserve can be used to recapitalise public sector banks.
“In India though, even as the autonomy of Reserve Bank is an issue, the amount of surplus transfer or the capital requirement of the Reserve Bank have never been variables in defining the government-central bank relationship,” former RBI Governor D Subbarao said in his tell-all book `Who Moved My Interest Rate?’.
The final nail in the coffin was perhaps when the government started demanding a review of RBI’s corporate governance and wanted the board of directors to enjoy greater role in decision making, undermining the governor’s role.
with input of et
