RBI autonomy in focus after a tumultuous year
At the heart of the discord was the issue of the autonomy that RBI has tried to jealously protect in the face of attempted encroachments by the government on its turf .Updated: Dec 31, 2018 10:11 IST
Differences between the finance ministry and the Reserve Bank of India (RBI) over the direction of monetary policy and the level of borrowing costs are not uncommon. In 2018, the discord was on full public display until, finally, RBI Governor Urjit Patel quit abruptly on December 10, citing personal reasons.
The points of conflict between the RBI under Patel and the government were wider than they had been in the past, ranging from the government’s proposed use of RBI’s capital reserves, a demand rebuffed by the central bank, more liquidity support for non-banking financial companies (NBFCs), a dedicated liquidity window for NBFCs, and easing of lending restrictions on 11 state-run banks with a low capital base and laden by bad debt. The government admitted that it used Section 7 of the RBI Act to give directives to the central bank on matters of public interest.
“They (differences) played out much more in the public domain. Earlier, the friction between RBI and the ministry of finance was on specific policy issues. This time round, the differences were wide ranging and on a wider canvas. Another difference is that this time round, the issues are being fought through the board of the RBI while earlier the standoff used to be typically between the governor and the finance minister,” former RBI governor D. Subbarao said.
At the heart of the discord was the issue of the autonomy that RBI has tried to jealously protect in the face of attempted encroachments by the government on its turf .
RBI expressed its dissent multiple times in 2018 through public speeches, the most notably one being an Octobver oration by deputy governor Viral Acharya on RBI’s autonomy. “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,” Acharya warned.
To be sure, friction between the banking regulator and the finance ministry has periodically spilled into the open. After RBI under Subbarao failed to loosen credit to boost economic growth in 2012 because of high inflation, then-finance minister P. Chidambaram made his displeasure plain. “Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth, then we will walk alone,” Chidambaram said then.
In 2018, the National Democratic Alliance government has been trying to ensure sufficient liquidity for NBFCs that have been hurt by the downfall of Infrastructure Leasing & Financial Services (IL&FS), boost access to fiance for small-scale industries and ease stringent lending restrictions on some state-owned banks. In past years, differences between the government and RBI hinged on other monetary policy matters.
“In 2011, the debate was on the operating procedure of monetary policy. In 2012-13 it was a multiple indicator approach. In 2013 the focus shifted to the singular objective of focusing on inflation, that too CPI (consumer price index). By 2016, the RBI shifted to MPC (monetary policy committee) where the monetary policy decision will be taken by a committee. We moved from individual to institution. In 2018, which is the pre-election year, flow of credit was hardly happening. All these changes also meant that the conflict between the government and RBI had to rise,” said an economist who didn’t want to be named.
The government has said that it respects the autonomy and independence of the central bank, which new governor Shaktikanta Das, a former civil servant, has pledged to uphold.
“I will try and uphold professionalism, core values, credibility and autonomy of this institution. It’s an honour and great opportunity to serve RBI. I will try my best to work with everyone and work in the interest of Indian economy,” Das said at his first news conference after taking charge at the RBI.
Subbarao says he doesn’t expect radical change from past practices. “There should be no presumption that the new governor will undo everything that the former governor has done. RBI works as an institution and every governor is guided by the collective wisdom of the RBI. So will the current governor. I don’t see a quantum break from the past,” he said.
Not everyone is so sanguine. “I think RBI’s independence is being compromised. The fact that a governor was forced out—of course he resigned but it is easy to see where it came from; the board of RBI turning activist; the mention of Section 7 by the government and replacing the governor with one of their own from the ministry indicates that RBI’s autonomy is already diluted,” said Ananth Narayan, associate professor (finance) at SP Jain Institute of Management and Research.