Tuesday, April 13, 2021

Centre-RBI tiff

The war of words between the Centre and the Reserve Bank of India (RBI) top brass with the Governor threatening to resign in the event of tinkering with the autonomy of the Central bank shows that all is not well with the working of the government. The jumping in the fray of some affiliates of the Sangh Parivaar at this juncture also exposes the mindset of the right wing organizations to put their weight behind the Centre against the interests of the autonomous institutions if they assert themselves. The fringe elements of the right wing groups entering such a war of words only exposes the authoritarian manner in which the central government is functioning caring two hoots for the autonomy of the institutions in the country. The Centre on the other hand has shrugged off the criticism from the opposition political parties and described it as ‘vested interests’ of the politicians and vowed to go ahead with its own scheme of things irrespective of the opposition from the constitutionally and democratically established institutions. The recent tensions over the last few months between the RBI and the Centre found spectacular release over the weekend through a public speech by Deputy Governor Viral Acharya. “Governments that do not respect Central Bank’s independence,” said Viral Acharya, “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.” These are very strong words and raise the question: why? This is not the first time that the RBI has had a face-off with the mandarins in the Union Finance Ministry, and it will not be the last. India has had Finance Ministers who were frustrated enough to say that they would ‘go alone’ in driving the economy, and RBI Governors responding that the Centre would still be thankful that the Central bank exists. Indeed, disagreements between RBI and Finance Ministry over setting benchmark interest rates have been common over the years. What appears to be different this time is that the disagreements, none of which are insurmountable, appear to be over regulation. There are three major issues on which the Centre seems to have irked the RBI. Firstly, it has refused to accept Governor Urjit Patel’s point that the RBI is held back due to lack of sufficient powers in regulating Public Sector Banks (PSBs). Secondly, it is the tussle over the RBI’s burgeoning reserves, a piece of which the Centre is eyeing to bridge its fiscal gap. The RBI has resented this approach of the government. And thirdly, it is the attempt by the Centre to set up an independent payments regulator, which the RBI sees as encroachment of its turf. Sight cannot be lost of the fact that RBI and the Centre have been at loggerheads over the issue of fixation and revision of interest rates as per the market conditions and economic well being of the country. The Centre has been pushing for more lending by the PSBs to its favourite corporate houses which fall in the category of crony capitalists, who extend liberal funding to the ruling political party. In fact, it has appeared time and again that some selected corporate houses are guiding the financial agenda of the Centre. The RBI has put its foot down on these moves of the Centre. Centre has several grouses, the chief among them being over an RBI circular of February 12 which redefined NPAs and revised the framework for resolution. The central government is also upset that the RBI is not doing enough to ease the ongoing liquidity squeeze through extraordinary measures. These are issues that could be easily addressed by sitting around a table, but the fact that they have not done so points to a complete breakdown of communication between the RBI and the central government, something that bankers have been privately acknowledging for some time now. A certain amount of tension is systemically in-built given their different perspectives: one is short-term and political; the other is long-term and technical. Such tensions are good for the economy. Yet, that is no excuse to spar over turf or make statements aimed at pressuring the other side into acting in a particular manner. The Centre and RBI must talk behind closed doors and resolve their differences as mature entities, as they have done so many times in the past.