New Delhi: The huge public rift between the government and the Reserve Bank of India will play out after RBI board meeting today. The meeting was the first since the conflict became public knowledge and the full extent of damages and compromises is expected to be known after the meet.
Will RBI governor resign?
Amid demands from some quarters for RBI governor Urjit Patel’s resignation, Chairman of the Parliamentary Standing Committee on Finance Veerappa Moily Sunday said if he quits over the stand-off between the top bank and the Centre, it will send a bad signal to global markets.
“If Patel decides to resign over its (RBI) differences with the central government, it will be a very sad and bad for the Indian economy. It will also send a bad signal to global markets just as Raghuram Rajan’s exit did,” the former Union Minister said.
Noting that RBI’s credibility would be shaken if Patel resigns, Moily said the entire world economy looks up to any central bank of any country and the markets would also be affected.
Moily said, “When Arun Jaitley presented the first budget of the NDA, the economic survey report said the fundamentals of the economy were strong, that means it is a compliment to the Congress regime. But today can they (NDA) say with confidence that the fundamentals of the economy are strong? The answer is no. This only implies that the four-and-a-half years of NDA rule has destroyed and eroded the fundamentals of the country’s economy.”
What is the problem?
A public spat: Last month, the government invoked section-7 of the RBI Act that empowers it to issue directions necessary for public interest to the RBI from time to time, after consultation with the bank’s governor.
In a speech, RBI Deputy Governor Viral Acharya spoke about the independence of the central bank, arguing that any compromise could be ‘potentially catastrophic’ for the economy.
Moily too said, “RBI cannot be managed as a government department. It is an independent autonomous organisation which has been created by an act of Parliament.”
Best and worst case scenarios
If both sides pull back from the brink, then it implicitly signals a compromise—especially since the board is expected to take up the agenda carried over from the previous meeting, the one that ended in an acrimonious public fallout. So far, the signals are mixed.
The points of discord include relaxation of prompt corrective action (PCA) of public sector banks, aligning capital adequacy norms for Indian banks, addressing the liquidity squeeze faced by small and medium enterprises and the need for a new capital framework for RBI.
Last week by Rashtriya Swayamsevak Sangh (RSS) ideologue and RBI central board director, S Gurumurthy said, “As my understanding goes, the government is only asking for a formulation of a policy as to how much reserve the central bank must have. Most central banks don’t have reserves of this kind at all, only RBI does.”
If neither side is willing to revisit its stance, it is likely that the board would be forced to adopt a vote. According to Section 8(3) of the RBI Act, the four deputy governors and the two government representatives do not have voting rights. That leaves the governor with the casting vote and 11 other members to decide the fate of the resolution.
In the final analysis, it is clear that a lot will depend on the guidance provided by Patel. A person familiar with the developments at the central bank said that the union government would be aggressive in its interventions and also hold RBI deputy governor Viral Acharya to task for publicly airing the internal board discussions in a speech.