Ten­sion to es­ca­late as govt keeps up heat

Financial Chronicle - - FRONT PAGE -

THE RBI board meet­ing on Novem­ber 19 prom­ises to be a stormy af­fair, with the gov­ern­ment mak­ing up its mind to main­tain pres­sure on the cen­tral bank over sur­plus re­serves, on lift­ing lend­ing curbs on weak banks and ad­dress­ing liq­uid­ity is­sues for real es­tate and NBFC sec­tors even if it means a di­rect provo­ca­tion for gov­er­nor Ur­jit Pa­tel to step down.

The fi­nance min­istry has made its stand clear to the Re­serve Bank of In­dia (RBI) that changes in its reg­u­la­tions were re­quired to pro­mote eco­nomic ac­tiv­ity and prevent the econ­omy from slow­ing down in the ab­sence of liq­uid­ity. The RBI so far has not re­lented on any of the de­mands of the gov­ern­ment, push­ing the Cen­tre to make a ref­er­ence to Sec­tion 7 of the RBI Act without ac­tu­ally in­vok­ing it. It must be men­tioned that some of the de­mands put for­ward by the Cen­tre are ill-con­ceived. Ex­perts sug­gested that re­serves with the RBI can­not be trans­ferred as it is no­tional. The gov­ern­ment gets its rev­enue from the RBI only in the form of div­i­dend de­clared by the cen­tral bank an­nu­ally. The Sec­tion 7 of the RBI Act gives ex­clu­sive pow­ers to the gov­ern­ment to con­sult and give in­struc­tions to the cen­tral bank to act on cer­tain is­sues that the gov­ern­ment con­sid­ers se­ri­ous and in pub­lic in­ter­est.

RBI so far has not re­lented on any of the de­mands of the gov­ern­ment

The Cen­tral gov­ern­ment has never used this power even dur­ing the cri­sis sit­u­a­tion dur­ing 1991. Sources in the gov­ern­ment said the RBI gov­er­nor must recog­nise and pri­ori­tise the prob­lems of the econ­omy and dis­cuss all is­sues with board mem­bers be­fore com­ing to any con­clu­sion.

The Novem­ber 19 meet­ing as­sumes im­por­tance as it will not be just the RBI where the fo­cus will be, it will also be on gov­er­nor Pa­tel whose re­sponse to these is­sues will be keenly watched by the gov­ern­ment nom­i­nees on cen­tral bank’s board, said sources.

The fi­nance min­istry is also aware that un­der the cur­rent set-up it can go as far as rais­ing the is­sues at the board level, be­yond that there is noth­ing it can do as the RBI’s cen­tral board is a largely sym­bolic one, with no di­rect say in the bank’s di­rec­tives and poli­cies.

This meet­ing's out­come on RBI's will­ing­ness and re­sponse will to a large ex­tend de­cide if Sec­tion 7 will be needed to be in­voked or not, how­ever sources said they will find ways to in­crease pres­sure on the RBI and Pa­tel via the board be­fore mov­ing to in­voke sec­tion 7.

Ten­sions be­tween the two sides be­came pub­lic last month when RBI deputy gov­er­nor Vi­ral Acharya gave a speech that brought to light the frac­tious dis­pute be­tween the bank and the gov­ern­ment on is­sues rang­ing from lend­ing curbs to who con­trols the in­sti­tu­tion’s re­serves.

Acharya said that un­der­min­ing cen­tral bank in­de­pen­dence could be “po­ten­tially cat­a­strophic.”

The fi­nance min­istry, sources said, has been in­creas­ingly irked by Pa­tel and his team’s re­luc­tance to recog­nise and ad­dress de­mands and en­gage in a di­a­logue on weak banks is­sues.

The RBI says its ac­tion is to help these banks avoid fur­ther NPAs and dis­ci­pline their lend­ing and op­er­a­tions.

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