The RBI vs finance ministry: An uneasy truce holds for now
The immediate crisis in the Reserve Bank of India has passed. The government has not used the buy-now, infamous Section 7 that allows it to direct the central bank to undertake a particular course of action. The Governor of RBI has not resigned. And both sides have gone out of their way so that the nine-hour long board meeting on November 19 ended on a cordial note.
It would be imprudent to believe the crisis is over and all is well, though. For years now, and not just under this government, the RBI and the finance ministry have had opposing views on liquidity, interest- and exchange-rates. That could have been managed — indeed, it has been in the past — but the finance ministry also believes that the RBI slipped in its handling of the fraud at Punjab National Bank and the mess at IL&FS. The ministry also doesn’t approve of the central bank’s continued insistence that at least half the state-owned banks in the country will remain under the so-called Preventive Corrective Action, which crimps their lending abilities. Then there’s the issue of the quantum of reserves the RBI needs. It has around Rs 10 lakh crore and the government’s view is that it needs just around half that.
None of these issues has really been addressed by Monday’s board meeting. Most have been kicked down the road, with committees being formed (or, to be exact, with an intent expressed to form committees) to look into them. There are reports that the most important of these, to address the issue of reserves, will be formed by the end of the week, but it is a committee and, like other committees, will take its time to arrive at a decision.
And so, even as it is important to understand that this isn’t a political issue — it is the kind of thing that could have happened, and, indeed, has happened, under other governments — it is imperative to realise that what we have now is an uneasy peace. For its part, the central bank has been obstinate about its reserves, displayed a seeming lack of flexibility, and not communicated well (and some of its communication has been intemperate). For its , the government hasn’t trusted RBI to do the right thing by the economy, listened a little too much to market voices and bank managers, and used its officers to respond to some of RBI’s utterances in similar vein.
Given their respective short-term interests, it is unlikely the RBI and the finance ministry will ever be on the same page (although it would definitely help if they are in the same chapter, even book).