Can RBI’s 18 wise men find a middle ground?

There is a slender hope that the Reserve Bank of India and the Finance Ministry will be able to reconcile their differences when the central bank’s board meets on Monday.

Not unless, the government has the good sense to work towards a rapprochement and the RBI Governor is equally ready to bends backwards to accommodate some of the sensitivities of the ruling dispensation in the run-up to the general elections.

The major sticking point thus far has been the stressed financial condition of micro, small and medium enterprises, the well-being of which is of paramount importance to the BJP government in an election year.

In a speech last week, S Gurumurthy, the RSS ideologue who is a government nominee on the RBI’s central board, lashed out at the restrictions on bank lending, saying it was damaging the economy. “We are a bank-driven economy... in a bank-driven economy if you restrict the banks, you are restricting the economy, you are restricting the flow of funds,” he had said. Keeping this sentiment in mind, the government is likely to exert pressure for easier lending policies at Monday’s board meeting – the first to be held since the differences between the RBI and the government came into public domain.

There was a glimmer of hope when RBI Governor Urjit Patel met Prime Minister Modi last week. But since then, the utterances of RSS ideologue S. Gurumurthy have turned the stand-off into a more grim discussion about the future of the central bank as an institution. Packed with government nominees who can be counted on to support the ruling dispensation, the central board of the RBI is being transformed from having to play an advisory role into one that will be proactive and can be a catalyst for policy change. Some economists fear it could erode the bank’s independence and diminish the role of the Governor into being just a face of the RBI.

Amid an uneasy truce that has prevailed ever since it was indicated Urjit Patel may have to resign, if he does not play along, the government has also indicated that it would like to alter the benchmark of what is a safe reserves limit for the central bank and the cushion it must maintain for a rainy day. This, in turn, has elicited the criticism that the government is eyeing the coffers of the central bank.

Among the eternal optimists, there is an expectation that the standoff between the RBI and the Government might end in a compromise. For, both sides realise that there is nothing to be gained, and a lot of pain to be inflicted on the economy, if the positions the two have taken remain unresolved. A middle ground has to be found.

But there are others who feel the government must seize the opportunity to instil in the RBI board a more “nationalist vision,” which would, at the moment, mean cutting the interest rates, transferring surplus funds to the government and easing bank lending curbs.

The rest would follow later.