Modi Government to Keep Up the Pressure on RBI Governor

  • Modi Government to Keep Up the Pressure on RBI Governor

Modi Government to Keep Up the Pressure on RBI Governor

The government intends to keep pressing demands for the country's central bank to relax lending curbs and hand over surplus reserves even if it risks provoking a resignation by the bank's governor, three sources familiar with the government's thinking told Reuters. Sources have confirmed to The Indian Express that the RBI views this attempt by the government to dip into its reserves can adversely impact macro-economic stability. They have been hurt in recent weeks because of defaults by a major financing company. The RBI did not respond to an email seeking comment.

RBI Deputy Governor Viral Acharya in October during a speech said the government might face markets' wrath if it was seen eroding the central bank's independence.

"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; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of worldwide investors, and longer life spans", Acharya had said. The government had then appointed Urjit Patel as his successor.

These issues may figure during the RBI's board meeting on November 19. He had also said how a transfer of excess reserves from a central bank to the government can be "catastrophic" and may ignite "economic fire".

He said, "The role of the central bank is to be the wise counsel, like Dravid, not to make operational decisions and certainly not be loud like Navjot Sidhu".

Still, the government sources say they will find ways to increase pressure on the RBI and Patel via the board before moving to invoke Section 7. The framework was reportedly adopted in July 2017 "unilaterally" by the banking regulator and the government nominees on the board were absent from the meeting, said the Finance Ministry.

Earlier, Moneylife had reported that as the government and central bank are engaged in a power tussle, there is a chance that Patel could step down. "As a driver, being the government, it has the possibility of not putting on the seatbelt, but of course, if you don't put on the seatbelt, you can get into an accident which can be quite severe".

However, the RBI is not a department of the Finance Ministry and if the government does invoke section 7, maybe it should also state beforehand that any consequences of its directive will be the responsibility of the government and not the RBI. Previous governors too had occasionally pointed out the government's overreach, when it came to the functionality of RBI.