Govt, RBI step back from the brink?
A day after the two sides crossed each other, finance ministry says RBI’S autonomy is essential, but will continue to argue its case
NEWDELHI/MUMBAI: A day after the two sides publicly and bitterly crossed each other, the Reserve Bank of India (RBI) and the Union government took a step back on Wednesday.
However, going by the signals—including a short statement issued by the ministry of finance and new disclosures that have come to light—neither side appears willing to blink, suggesting that both are ready to dig in their heels for what is turning out to be a battle of attrition.
Conceding that differences can arise, the carefully-worded finance ministry release admonished the central bank, saying, “(The) government of India has never made public the subject matter of those consultations (with RBI). Only the final decisions taken are communicated,” before adding, “The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so.”
Not only do the developments on Wednesday suggest that the differences are deep rooted, but they also indicate that the government is trying to give new contours to what is normally a testy relationship between the executive and the central bank.
If indeed both sides are retreating from a public spat, then greater clarity on issues would emerge from the next RBI board meeting scheduled on 19 November.
A person familiar with the developments but who did not want to be identified said as much. According to this person, differences that have always been there sharpened in recent weeks after the collapse of Infra-
structure Leasing and Financial Services Ltd snowballed into a liquidity crisis for non-banking financial companies, which in turn squeezed lending to small and medium enterprises—the big catchment area for jobs creation.
As a solution, the Union government in its dialogue with RBI sought to exert pressure to relax restrictions on weak banks to lend to small businesses, deploy RBI’S capital reserves to generate additional liquidity and exempt power companies from the purview of a 12 February circular on bad debts.
The first letter was written after the Allahabad high court’s suggestion that the government consider giving directions to RBI under section 7 of the RBI Act in a case involving independent power producers, who by virtue of their accumulated debts fell foul of the newly minted insolvency code. Thereafter, it set out
another letter on 10 October seeking RBI governor Urjit Patel’s views on deploying the central bank’s capital reserves to infuse liquidity in the markets.
This letter, which turned out to be the proverbial final straw, pertained to regulatory issues including relaxing the prompt corrective action framework for public sector banks. All the three letters held out the threat of invoking section 7(1) of the RBI act.
Under this provision, if the government so wishes, it can, in exceptional circumstances, overrule RBI. It is tantamount to exercising the nuclear option and has never been employed.
Explaining the actions, the same person cited earlier said the situation was becoming irretrievable because the government’s perception was that, if unaddressed, the NBFC liquidity crunch could snowball into a crisis.
A subsequent board meeting on 23 October led to a heated exchange between the representatives of the Union government, including their director nominees, and the RBI top brass on the same issues.
A panicked RBI used a speech by its deputy governor, Viral Acharya, to articulate its objections in public on Friday. Using unprecedented language, Acharya warned against encroaching on RBI autonomy— something that drew critics of the government to argue that it was part of a larger malaise where key institutions were being undermined.
On Tuesday, the finance ministry chose to respond publicly, when finance minister Arun Jaitley accused RBI of sleeping on the job when public sector banks were nudged by politicians to lend indiscriminately between 2008 and 2014.