Finance Ministry baits RBI afresh, two days after declaring truce

New Delhi: Two days after declaring a truce with the Reserve Bank of India, the ministry of finance has baited the central bank again, pointing out that the financial markets remain resilient and there are no signs of the wrath of the market.

Finance Ministry baits RBI afresh, two days after declaring truce

This threatens to again bring the war between the RBI and the government out in the open.

“Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4% during the week and bond yields below 7.8%. Wrath of the markets?” Subhash Chandra Garg, secretary, department of economic affairs, wrote on microblogging site Twitter.

Garg’s comments are seen as a response to a speech by RBI deputy governor Viral Acharya last week in which he had batted for autonomy of the RBI and pointed out that governments had a short-term outlook given that that they faced elections every five years.

Acharya had highlighted the challenges faced by the RBI in maintaining its independence and flagged issues like dual regulation of state-run banks by the government and RBI, the attempts to erode RBI’s balance sheet, and efforts to reduce its powers by proposing an independent payments regulator.

Acharya had concluded by saying, “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of international investors, and longer life spans.”

This was followed by a war of words with finance minister Arun Jaitley pointing out that an elected government was accountable to the people of the country.

After reports emerged that the government had moved to start consultations with the RBI under Section 7 (1) of the RBI Act, a provision that has never been used in the history of independent India, the government tried to take a step back and stated that it respected the autonomy of RBI. However, in a carefully worded statement on Wednesday, it also admonished the RBI saying that the government “has never made public the subject matter of those consultations (with RBI). Only the final decisions taken are communicated”.

Tensions between the Urjit Patel-led RBI and the government have been simmering from at least the beginning of this year. The government found a tad too strict the RBI’s 12 February circular on stressed assets that did away with all restructuring schemes and forced banks to make higher provisioning for all such loans.

A war of words broke out after Jaitley blamed the RBI for not doing enough to prevent the Rs 14,000 crore Nirav Modi fraud that hit Punjab National Bank. Patel, in a speech countered this, pointing to the lack of regulatory and supervisory powers with the RBI when it came to state-owned banks. He had said a system of dual regulation existed for state-owned banks and the RBI had no powers to remove their bosses or restructure their boards.

More recently, the government has been pushing for relaxation in the prompt corrective action framework that saw the RBI impose lending restrictions on 11 state-run banks, arguing that credit flow to the SME sector was being affected. The RBI did not accede to this.

Following concerns raised by non-banking financial companies over lack of liquidity, the government also favoured a special liquidity window. But again the RBI did not agree.

The RBI also opposed the draft of the new payments and settlement law that proposed an independent payments regulator, clearly limiting the central bank’s say in the matter.

source: livemint


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