Differences between RBI, govt data back to British era
NEW DELHI: The ongoing spat between the government and the Reserve Bank of India (RBI) – it has resulted in speculation that the government may use a never before-used provision of the law to direct the central bank to do something, and also that this could result in the resignation of RBI governor Urjit Patel – isn’t the first time there has been a disagreement between the two, and it probably won’t be the last. Such friction, usually over specific policies goes back a long time.
Be it the first RBI governor under British rule or the second Indian governor in the 1950s, several central bank chiefs have had run-ins with governments of the day, according to experts who have chronicled such episodes.
Last week, RBI deputy governor Viral Acharya warned that attempts to undermine the central bank’s independence could be “potentially catastrophic”, amidst reports that the government is unhappy over a number of issues, including interest rates, how to deploy reserves and the steps to stop the rupee’s slide.
Finance minister Arun Jaitley hit back on Tuesday, saying RBI seemed to have looked the other way when banks gave loans indiscriminately during the previous regime.
The next day his ministry moved to bring things down a notch, reiterating that the government respected the central bank’s independence.
In his book ‘Who Moved My Interest Rate?’, former RBI governor D Subbarao quotes predecessor YV Reddy’s “stock response” to the question on the central bank’s independence. “The Reserve Bank is totally free within the limits set by the government.”
For the central bank is not fully autonomous under the law and the Centre “may give directions to the Reserve Bank where considered necessary in public interest to do so..,” writes Subbarao, who was the RBI governor from 2008-2013.
Subbarao himself had differences with then finance minister P Chidambaram . In October 2012, the Congress leader “went public with his displeasure at the Reserve Bank’s decision not to cut interest rates,” according to Subbarao.
“I found that all through my tenure, the government was distinctly uncomfortable with the Reserve Bank raising interest rates and seemed convinced that monetary policy was choking growth,” he writes.
He stresses that his “counterargument to the finance ministry used to be that it was not high interest rates that were standing in the way of investments.”
“What matters in investment decisions is not the nominal interest rate but the real interest rate, which is the interest rate after knocking out the impact of inflation.”
On why central banks need autonomy, Subbarao says in the book that the aim of monetary policies is to “preserve price stability by maintaining low and steady inflation consistent with the economy’s potential growth rate”. This needs long-term views and maybe some short-term pain.
“But political regimes, especially democracies, have little tolerance for such pain; electoral politics push them into compromising long-term sustainability for short-term expediency,” Subbarao adds in the book.
Such differences date back to 1936, when the first RBI governor Sir Osborne Smith quit after 15 months of the founding of RBI (but stayed on till June 1937) following differences with the colonial government on exchange rate policy. Benegal Rama Rau, successor to the first Indian governor CD Deshmukh, too, had to resign in 1957 after differences over monetary policy, credit policy and deficit financing, according to Rahul Bajoria’s ‘The Story of the Reserve Bank of India’.
Even Manmohan Singh, who was the RBI governor from 1982-85, was believed to have been in a disagreement with then finance minister Pranab Mukherjee, according to TCA Raghavan’s ‘A Crown of Thorns’.
SEVERAL CENTRAL BANK CHIEFS
HAVE HAD RUNINS WITH GOVERNMENTS OF THE DAY, ACCORDING TO EXPERTS