It’s no secret that the Government and the RBI have been waging a cold war for some time now. With heated opinions from both sides and the resignation of the Urjit Patel (former governor of RBI, with the shortest tenure as Governor), this feud has surpassed any other standoff, that these parties have had. How and why did they fall out and what will be the consequences? Let’s try to analyse each of these points.
The cold war erupted when the government made the Monetary Policy Committee (MPC) operational. The MPC was established as an advisory committee comprising of three members from the RBI and three from the government, which advised the Governor during the process of drafting policies. However, the veto power was held by the Governor. Making the MPC operational lessened the powers of the Governor and allowed the government to interfere with policymaking through its 50% representation in the committee. This threatened the autonomy of the RBI. What acted as the catalyst for the stand-off were three letters sent by the Central Government to the RBI for consultation with the Governor. This was done under the contentious Section 7, which allows the Government to direct the RBI to do certain tasks which the Government considers necessary for public interest. Section 7 was an act that was meant for emergency situations, and had never been invoked before – not even during the 1991 financial crisis. The topics addressed in these letters were issues like providing credit to SMEs, liquidity for NBFCs, and interest rates.
The Government’s argument was that these issues needed to be resolved immediately, and the RBI should take appropriate steps in that direction. The RBI, on the other hand, believed that “fixing” these issues would weaken the economy and hence, could not be carried out. The RBI gave the Government a lesser dividend than it had in the years before, claiming that larger reserves had to be maintained. However, the Government said it needed the dividend to pump money into the economy. However, a large number of non-supporters believed that the Government wanted to reduce its fiscal deficit before the 2019 elections, which has blown way off target. The Government showed strong disapproval to this claim and the Finance Ministry took the final step of invoking Section 7, as it believed that the RBI was not cooperating. The usage of this law may very well threaten the autonomy of the RBI, which till now has remained completely separate from the Central Government and is free to take its own decisions without any interference.
Since the start of his tenure, Urjit Patel hasn’t had it easy. Within merely two months into being Governor, demonetization hit the country. That marked the start of differences between the Central Government and the RBI. After several differences on various issues and the fear of RBI losing its autonomy, both parties met on 19 November to sort out the issues. Even though it seemed that all was sorted, Patel resigned on the 10th of December, after months of being at odds with the Government. His resignation came as a shock, however many praised him for choosing resignation over succumbing to the demands of the government. The issue of RBI’s autonomy was again brought up by the media, and the Government had to tread carefully before taking any measures that threatened the autonomy of the RBI.
The new Governor Shaktikanta Das has his task cut out for him. He has already held meetings with various banks to discuss the current liquidity situation and will have to act upon it quickly. Further discussions with the Government are necessary to ensure both parties remain on the same page. Das also has to ensure that the RBI won’t be controlled by the whims of the Government.
The Government has been pouring money into various developmental schemes for the Indian taxpayer and has strayed way off its fiscal deficit target. It called upon the RBI’s fund to cover the same. Also, with the high rises in oil prices and the depreciating worth of the rupee, the Government pushed policies to combat inflation rather than let the RBI make policies which were warranted under India’s normal course of the business cycle. All in all, the Government wanted the RBI to aid it in painting a pretty picture of the Indian economy before the 2019 elections. It was willing to make a tradeoff of India’s long term financial health for the same. The RBI has, by rejecting these proposals by the Government even under considerable pressure, shown that it shall always keep the country’s economic future as its main priority.
However, the citizens can still feel optimistic about the state of their country’s economy as the Government and the RBI seem willing to engage in dialogue. Hopefully, a compromise can be arrived at, in which both parties can be satisfied.