Tension to escalate as govt keeps up heat
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.