RBI-Centre turf war: Govt reportedly upset with bank for making rift publichttps://indianexpress.com/article/business/banking-and-finance/rbi-centre-turf-war-govt-reportedly-upset-with-bank-for-making-rift-public-5424588/

RBI-Centre turf war: Govt reportedly upset with bank for making rift public

Government officials believe that RBI Governor Urjit Patel has some responsibility for the controversy, and he cannot expect an extension of his current three-year term - which ends next September - “as his right”, one of the officials added.

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The officials in New Delhi were particularly angry that Acharya launched the attack while Modi was about to head to Japan for talks with Prime Minister Shinzo Abe, the first source said. (Express Photo by Pradip Das)

Days after RBI Deputy Governor publicly spoke about the tussle between the government and the Reserve Bank of India, the Centre is reportedly upset about the rift being out in open. Senior officials who spoke to news agency Reuters told the government fears it could tarnish the country’s image among investors.

On Friday night, the RBI Deputy Governor Viral Acharya warned that undermining a 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. Delivering the A D Shroff Memorial Lecture in Mumbai, Acharya said that “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.” He cited the Argentine government’s meddling in its central bank’s affairs in 2010 as an example of what can go wrong. That led to a surge in bond yields that badly hurt the South American economy.

The government officials, who did not wish to be named, said the Centre wanted to keep things confidential. An official, based in Prime Minister Narendra Modi’s office, said it was “very unfortunate” that the RBI took the matters public. “The government is very upset. It was not expected from the RBI,” the official told Reuters. “The government respects the autonomy and independence of the RBI but they must understand their responsibility,” a second official said. An RBI spokesman was not immediately available for comments after business hours.

The RBI-government rift comes after the government’s demand that RBI eases its lending restrictions on banks that have a low capital base and a massive rise in bad debts. Another contentious issue is the control over interest rates. While the Central bank wants sole authority over raising or lowering the interest rates, the government is unhappy over the bank decisions. Government officials have recently called for the RBI to relax its lending restrictions on some banks, and New Delhi has also been trying to trim the RBI’s regulatory powers by setting up a new regulator for the country’s payments system.

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The officials are also irked that Acharya made the remarks while Prime Minister Modi was about to head to Japan for the 13th India Japan Summit and talks with counterpart Shinzo Abe, a source said. Finance ministry officials remained largely silent in response to the speech at the weekend, as they didn’t want to aggravate the issue when Modi and top officials were in Japan, this official said.

Editorial | An area of conflict

Government sources also believe that RBI Governor Urjit Patel has some responsibility for the controversy, and he cannot expect an extension of his current three-year term – which ends next September – “as his right”, one of the officials added.

Acharya had three of his fellow deputy governors in the audience and also thanked Governor Patel for his “suggestion to explore this theme for a speech”, in a show of unity from an institution typically known for its restraint.

Top government officials said they were surprised that Patel, who was appointed by the Modi administration in 2016, and cooperated with the Centre in the past, is now creating tensions when the government is facing criticism over handling of the economy before the 2019 General elections. The official in the prime minister’s office said Patel could face a tough time when he appears before a parliamentary standing committee on Nov. 12.

Previous RBI Governors, including YV Reddy, D Subbarao and Raghuram Rajan had conflicts with the finance ministry and the government on various issues relating to the RBI’s independence during their tenures.

Read | Tussle not new, Viral Acharya just flagging new issues

On Monday, a third government source said the finance ministry was worried how markets would respond to Acharya’s public comments, but felt more relaxed after they rose. The gains were largely a result of a separate announcement by the RBI about an injection of liquidity through government bond buying.

Modi’s government is pushing the RBI to relax lending norms for small businesses and pump more liquidity into the market to bolster economic growth before key state elections due in the next few weeks and the general election. “When we are facing problems on the external front like high crude oil prices, trade tensions putting pressure on our current account balance, can we afford another domestic crisis?” the third government source said.

(With inputs from Reuters)