The Modi government tries to justify its meddling with India’s central bank

One foot out of the door?
One foot out of the door?
Image: REUTERS/Francis Mascarenhas
We may earn a commission from links on this page.

The ugly spat between India’s central bank and the Narendra Modi dispensation reached a crescendo today (Oct. 31). Rumours that Reserve Bank of India (RBI) governor Urjit Patel was quitting over the government’s encroaching upon the banking regulator’s autonomy peaked on social media.

Hours later, the Narendra Modi government issued a statement, justifying that the autonomy of the central bank is important, however, within the limits of the RBI Act.

The statement read:

The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this. Both the government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy.

For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time. This is equally true of all other regulators. Government of India has never made public the subject matter of those consultations. Only the final decisions taken are communicated. The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so.

The government’s statement is the latest development in a public spat with the apex bank. Only yesterday (Oct. 30), finance minister Arun Jaitley had blamed the RBI for the huge pile-up of bad loans in the banking sector. Not checking indiscriminate lending by banks between 2008 and 2014 had led to the crisis, he had said.

Ironically, it is the government that has been asking the RBI to relax some of the tough norms it has since introduced to clean up the bad-loan mess. This intervention by Jaitley caused more friction. In a strongly-worded speech on Oct. 26, RBI deputy governor Viral Acharya had warned of “potentially catastrophic” consequences if the government keeps meddling in its affairs.

There are other fault lines, too.

In the past year, the government, citing growth concerns, had allegedly tried to force the RBI to tweak interest rates. The apex bank, however, had set its eye on inflation.

There are also differences on who should govern the country’s thriving payments sector. The RBI opposes the government’s plan of an independent regulator for e-wallets and cards.

However, the tipping point came when the government reportedly tried to invoke section seven of the RBI Act for the first time. This section says:

The central government may from time to time give such directions to the bank as it may, after consultation with the governor of the bank, consider necessary in the public interest.

This powerful tool has never been used earlier, even in dire times such as the 1991 balance-of-payments crisis or the 2008 global meltdown. So invoking section seven now, when the economy is in a far better state, is uncalled for, believe many experts.

Want to read more from Nupur Anand? Subscribe to Quartz Private Key—Quartz’s premium crypto newsletter, delivered twice weekly.