Mint street and north block found little in common to tango

KOLKATA: From interest rate increases, to the February 12 circular on non-performing loans, to the defiance on liquidity measures for non-banking finance companies, the relationship between the Reserve Bank of India and the government was always frosty, which has now boiled over.

The fact that RBI governor Urjit Patel did not freely communicate with bankers, industry captains and market participants made matters worse between the fiscal and monetary authorities.

The rift escalated as Mint Street felt that North Block slighted it on issues such as liquidity management following the NBFC crisis, rules for weak banks, disclosure norms for defaults which are essentially the remit of any central bank. Economic affairs secretary Subhash Chandra Garg’s suggestion for setting up an independent payment regulatory board further undermined the central bank’s role, experts said.

However, rifts between governments and central banks are nothing unusual. Central banks across the globe, including the US Federal Reserve, seem to be getting drawn into conflict with the administration.

Argentina’s central bank head Martin Redrado stepped down in 2010, protesting against the Latin American government’s “permanent trampling of institutions”.

On Monday, Patel became the second RBI governor to resign; the first being Benegal Rama Rau who had resigned in the fifties during the Nehru government because of differences with then finance minister TTK Krishnamachari.

“On account of personal reasons, I have decided to step down from my current position effective immediately,” Patel said in his resignation letter.

But the fact is he was under immense pressure ever since the talk of imposition of Section 7 under RBI Act began doing the rounds amid the growing conflict. The provision empowers the government to issue directions to the RBI.

In his tenure, Patel had cut repo rate once in October 2016, but then raised it thrice by 25 bps each time since August 2017 to 6.5 per cent, much against the government’s wishes which had been seeking easy money flow to revive the economy.

India’s GDP grew 8.2 per cent during the first quarter, but economists said it was on a low base while during the second quarter it rose by a lower quantum of 7.1 per cent.

The uneasy relationship aggravated with the government demanding higher dividends from the RBI and questioning the need to keep excess reserves for contingencies.

Former Chief Economic Advisor Arvind Subramanian advocated that this excess reserve can be used to recapitalise public sector banks.

“In India though, even as the autonomy of Reserve Bank is an issue, the amount of surplus transfer or the capital requirement of the Reserve Bank have never been variables in defining the government-central bank relationship,” former RBI Governor D Subbarao said in his tell-all book ‘Who Moved My Interest RateRs ’.

The final nail in the coffin was perhaps when the government started demanding a review of RBI’s corporate governance and wanted the board of directors to enjoy greater role in decision making, undermining the governor’s role.