RBI spat: Need to find a golden mean

[dropcap]T[/dropcap]ensions between the Reserve Bank of India and the Modi government are showing signs of further precipitation, with both sides hardening their positions. The undercurrents of strain came out in the open last week when deputy governor Viral Acharya said in a speech that undermining the central bank’s independence could be ‘potentially catastrophic’, in an indication that it is pushing back hard against government pressure to relax its policies and reduce its powers. The finance ministry has taken serious objection to the way the senior RBI official discussed the problems openly. It later transpired that Acharya brought up the topic at the behest of his boss governor Urjit Patel, who has been adopting a belligerent stand on government aggression.

Signs of further straining of relations were manifest on Tuesday when finance minister Arun Jaitley used the same speech medium to criticise the RBI for failing to prevent lending excess “The central bank looked the other way when banks gave loans indiscriminately during 2008 to 2014,” he said. Jaitley and Patel have not been seeing eye to eye on a host of issues and things have reached a point of almost complete breakdown in communication. That the flare-up has happened ahead of a scheduled meeting between the two has not helped at all.

The two sides have clashed on at least half-a-dozen issues this year alone, including inflation and interest rates, liquidity and credit disbursal, spilling over to issues of supervision and regulation, where the central bank is not ready to yield an inch. The government was also deeply upset with the RBI’s classification of non-performing assets and the harsh norms of loan restructuring. Serious differences have cropped up with RBI’s cure for the bleeding public sector banks. The latest flashpoint was provided by the crisis relating to the non-banking finance companies in the wake of the IL&FS fiasco, prompting a squeeze by the RBI, cutting off vital credit to small and medium enterprises so important for an economic pick-up.

The Modi government has had a particularly bad equation with the RBI right from the beginning of its tenure. The then governor Raghuram Rajan had become a thorn in the flesh as he expressed himself against Modi’s misadventure of demonetisation, which cost the internationally acclaimed economist a second term. Now Urjit Patel seems to be on the same boat and is seen even facing the threat of a premature end to his tenure. The RBI cannot be completely independent of the government, but its autonomy in its own areas needs to be recognised for the smooth functioning of the system. The increasingly problematic relationship will only further accentuate the criticism that the BJP government is destroying the democratic institutions one by one and give another handle to the Opposition to beat it.