RBI versus Modi government: Timeline of a bitter battle

You in or you out?
You in or you out?
Image: REUTERS/Danish Siddiqui
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India’s financial markets are on heightened alert ahead of a crucial board meeting of the country’s central bank today (Nov. 19).

The build-up to the meeting involved the public airing of differences between officials of the Reserve Bank of India (RBI) and those of the Narendra Modi government over a host of issues.

The government’s nominees and independent directors are expected to take on RBI governor Urjit Patel and his team over dividends, autonomy, and non-performing loans.

Earlier, on Oct. 31, reports emerged that Patel was even considering resigning over the government’s push for greater control of the banking regulator.

The government, at one point, was reportedly close to invoking a never-before-used clause of the RBI Act that allows it to issue directives. It also proposed new regulations to increase its supervision of the central bank.

Here’s a look back at how the confrontation and its various fault lines has developed since the current governor took charge at the RBI:


Sept. 04: Urjit Patel takes charge as governor of India’s central bank, succeeding Raghuram Rajan, who served a single three-year term.

Nov. 08: Modi announces the demonetisation of Rs1,000 and Rs500 currency notes. The move wipes out over 80% of notes in circulation in the economy.


June 07: Patel reveals that India’s monetary policy committee (MPC) has refused to meet finance ministry officials ahead of a monetary policy meeting. The request for a meeting from the ministry was interpreted by some as the government’s way of influencing the central bank into cutting interest rates.

While the RBI felt that lower rates would drive up inflation, the government wanted to shore up business sentiment.

The MPC, set up by the Modi government in September 2016, is a six-member committee tasked with deciding interest rates in India. Earlier, this power rested solely with the RBI. The MPC has three RBI officials besides the three government appointees.

By not buckling to the demand to cut interest rates, Patel was seen to be asserting the central bank’s autonomy.

Aug. 10: The RBI says it will pay the government Rs30,659 crore ($4.27 billion) as an “annual dividend,” less than half the amount the government had expected. Though the central bank mentions no official reason for the reduced payment, the costs borne by the apex bank during demonetisation is widely blamed.


Jan. 25: The RBI rejects government’s request for an additional Rs13,000 crore as annual dividend, reports The Economic Times newspaper.

Jan. 29: Punjab National Bank (PNB) files a complaint with India’s top investigative agency, the Central Bureau of Investigation, against jeweller Nirav Modi and his partners for defrauding the bank with forged documents. The scam is later revealed to be worth Rs14,356.84 crore, and becomes the latest face of India’s bad-loan crisis.

Feb. 12: The RBI issues circular asking banks to identify projects with even a day’s default and chalk out a resolution plan within 180 days.

Feb. 20: India’s finance ministry formally questions the RBI for any loopholes in the system that could have led to the PNB scam.

Feb. 24: Jaitley points a finger at the RBI over the scam: “Regulators have to have a third eye which is to be perpetually be open.”

March 12: Patel defends the central bank on the grounds that it has weak regulatory control over public sector banks such as PNB. He asks the government to strengthen the Banking Regulation Act, 1949.

April 09: The RBI puts 11 public sector banks under the prompt corrective action (PCA) framework for poor performance in handling bad loans. The classification restricts their lending capacity. Ironically, the government is irked by the move as it was looking to shore up businesses by opening their doors to lenders.

April 12: Patel’s predecessor Rajan reveals he had advised the government against demonetisation: “We didn’t think it was a good idea.”

Aug. 09: The Indian government appoints chartered accountant S Gurumurthy as a non-official director of the RBI. Gurumurthy, a vocal supporter of demonetisation, has been associated with Swadeshi Jagran Manch, a Rashtriya Swayamsevak Sangh (RSS) affiliate. The RSS is the ideological fountainhead of Modi’s Bharatiya Janata Party.

Aug. 30: In its annual report, the RBI finally reveals that 99.3% of the demonetised currency notes have returned to the banking system. Illegal wealth that had been held in cash was not wiped out, but was laundered during demonetisation, Modi’s critics contend.

Oct. 19: In a public dissent note, the RBI opposes an inter-ministerial committee’s recommendation to set up a separate regulator for digital payments in India.

Oct. 26: RBI deputy governor Viral Acharya gives a speech stressing the need to protect the central bank’s independence. In what is seen as a reference to Modi’s administration, Acharya says: “Governments that do not respect the central bank’s independence will sooner or later incur the wrath of financial markets, ignite an economic fire, and come to rue the day they undermined an important regulatory institution.”

Oct. 30: India’s finance minister Arun Jaitley blames the central bank for the brewing bad-loan crisis: “The central bank looked the other way when banks gave loans indiscriminately during 2008 to 2014.” That is, before the Modi government took charge in May 2014.

Oct. 31: The government considers to invoke section 7 of the RBI Act, which would enable it to issue orders to the central bank, reports The Economic Times newspaper. Patel meanwhile is considering resigning, multiple people familiar with the matter tell the television news channel CNBC-TV18.

Nov. 16: The government has proposed drafting new regulations to enable closer supervision of the RBI, multiple people familiar with the matter tell news agency Bloomberg.