RBI, government at point of no return

[dropcap]T[/dropcap]he stand-off between the Modi government and RBI governor Urjit Patel has taken a turn for the worse, with the Centre reportedly making an unprecedented demand for the transfer of Rs 3.6 lakh crore from the Reserve Bank’s capital reserves to the government coffers and the governor flatly reusing to oblige.

The Centre’s demand is built around the argument that the RBI has overestimated its capital reserves requirement and is sitting on idle money, which the government could use for more productive purposes, particularly for re-capitalising the public sector banks, which are in dire straights due to their toxic assets. But the RBI insists that such a course is fraught with danger as it could lead to macroeconomic imbalances.

The government has already been upset with the rigid policies of the RBI as it believed that the stand was not conducive to adding liquidity to the financial system, which was strangulating the growth of business and industry, already suffering the consequences of policies like demonetisation gone awry. The detection of large-scale doubtful loans by the public sector banks due to indiscretion in lending prompted the Urjit Patel-led RBI Establishment to clamp down further on liquidity, forcing the Centre to intervene using the provisions of the RBI Act that gave the government the powers to provide directions to the apex bank on broad parameters of monetary policy so that the economy gets the desired impetus. But understandably upset, Urjit Patel has not taken kindly to such gestures and has been on a path of confrontation, even threatening to resign if the government tried to force the issue. Naturally, the latest demand by the Centre has further precipitated the crisis.

The RBI governor is, however, seen to be getting into an untenable position, although the government’s alleged over-reach has invited criticism from the Opposition parties that the Modi government is destroying institutions one by one. But the view that is consistently gaining currency is in favour of the executive, which experts feel has the right to steady the course whenever it feels that the monetary policies are not in conformity with the objectives laid down by the government of the day. A statement by former Prime Minister Manmohan Singh, who was also once governor of the Reserve Bank, that it is the writ of the government that should run in matters of broad policy framework has helped the Modi government’s cause. In any case, the banking supervisor of a country is subject to the will of the government, which has the mandate of the people to run the affairs of the nation, including its economy.

The new developments place both sides in a point of no return, with the scales tilted more in favour of the government rather than the governor.