Always a fine balance

Always a fine balance


  1. The article discusses about the recent simmering tensions between the Reserve Bank of India and the Centre.

Important Facts:

  1. A certain amount of creative tension is systemically in-built between Reserve Bank of India and Centre given their different perspectives.
  2. For example, Centre’s concern is short-term and political while RBI’s concern is long-term and technical.
  3. Though such tension is good for the economy, but there are few issues over which both the Centre and RBI are irked over each other.
  4. Centre- RBI Conflict:
  • Non-Performing Assets: Centre has refused to accept Governor Urjit Patel’s point that the RBI is hobbled by lack of adequate powers in regulating public sector banks to handle the non-performing assets crisis.
  • Though the RBI expresses concerns about not having enough powers over PSBs but it does have nominee directors on bank boards which leads physical inspection and financial audits at banks.
  • Forex reserve and fiscal deficit: The Centre is eyeing RBI’s burgeoning reserves to bridge its fiscal gap which RBI resents.
  • Payments regulator: The Centre is attempting to set up an independent payments regulator, which the RBI sees as encroachment of its jurisdiction.
  1. Recent tensions: The government’s intervention through the board sparked recent tensions between RBI and Centre as follows:
  • RBI’s recent circular on stressed assets recognition: According to RBI recent circular, if a borrower delayed payment for even one day, he should be dragged to an insolvency court and the asset classified as a non-performing asset (NPA).
  • Diluted PCA: The Centre sees the prompt corrective action (PCA) framework by the RBI, which restricts weak banks from lending, as contributing to the liquidity crisis and wants it to be diluted.
  • Relaxed lending norms: Centre also wanted special dispensation by the RBI to help non-banking finance companies (NBFCs) apart from relaxed norms for lending to micro, small and medium enterprises.
  1. View of the former Governors on RBI’s autonomy:
  • YV Reddy In his book, Advice and Dissent: My Life in Public Service explains RBI autonomy under three functions:
  • Operational issues in which full RBI autonomy is mandated.
  • Policy matters where prior consultation with the government is required.
  • Structural reforms which requires “very close coordination” with the government.
  • Raghuram Rajan In his book “I Do What I Do”, points out that the position of the RBI Governor in the government hierarchy is not defined.
  • The Governor draws the salary of a Cabinet Secretary, and it is generally understood that he will explain his decisions only to the Prime Minister and the Finance Minister.
  1. Way forward:
  • The RBI could have heeded the Centre’s signals on easing liquidity through extraordinary measures in addition to routine open market operations to ease the liquidity crises.
  • Section 7 of the RBI Act allows the government to give written directives to the RBI in the public interest.
  • On critical issues, often the choice for the Governor is to concede to the government with or without a written directive. But tradition has been that both the government and the RBI have avoided recourse to this provision.
  • RBI is autonomous and accountable to the people ultimately, through the government and the onus is thus on responsible behaviour by both sides.
  • The Governor thus has to be conscious of the limits to his autonomy at all times, and the government has to consider the advice coming from RBI in all seriousness,
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