The Centre is reportedly upset with the Reserve Bank of India for publicly talking about a rift with the government, Reuters reported on Monday, quoting senior officials in the government. They said the government fears the rift could tarnish the country’s image among investors.
On Friday, RBI Deputy Governor Viral Acharya warned that governments that do not respect a central bank’s independence sooner or later incur the wrath of financial markets. Acharya said undermining a central bank’s independence was “potentially catastrophic” indicating that it was pushing back against government pressure to relax its policies and reduce its powers.
Government officials have recently called for the RBI to relax lending restrictions on some banks. The RBI also opposed a suggestion by the central government’s inter-ministerial committee to set up an independent regulator for payment systems.
An unidentified official in the Prime Minister’s Office told Reuters it was “very unfortunate” that RBI took the matters public. “The government is very upset,” the official said. “It was not expected from the RBI.”
Another official said it was vital that what happened between the government and RBI was kept confidential. “The government respects the autonomy and independence of the RBI but they must understand their responsibility,” the official added.
Government officials were allegedly angry that Acharya’s remarks were made while Modi was about to head to Japan for talks with Prime Minister Shinzo Abe, Reuters reported. Finance ministry officials remained largely silent on Acharya’s remarks as they did not want to aggravate the matter.
Government officials believe RBI Governor Urjit Patel bears some responsibility for the controversy. Acharya had thanked Patel for his “suggestion to explore this theme for a speech”. Patel cannot expect an extension of his current three-year term, which ends next September, “as his right”, one of the officials claimed.
The PMO official added that Patel may face a tough time when he appears before a parliamentary standing committee on November 12.
Government officials said they were surprised that Patel, who was appointed by the Modi administration in 2016 and initially cooperated with the government, is creating tension when the Centre is facing criticism over its handling of the economy before the 2019 General Elections.
Finance Minister Arun Jaitley and Patel are set to meet on Tuesday amid the growing tension, reported Bloomberg. Jaitley will chair a meeting of the Financial Stability and Development Council, which Patel is scheduled to attend.
One of the causes of the rift between the Centre and the RBI is the government’s demand that the bank ease its lending restrictions on banks that have a low capital base and a massive rise in bad debts. The RBI has identified 11 state-run banks, which have been barred from lending unless they increase their capital base.
The government is also reportedly unhappy with the bank for not cutting interest rates and raising them instead.
‘Better late than never’
Congress President Rahul Gandhi tweeted in support of the RBI chief. “Nice that Mr Patel is finally defending the RBI from Mr 56,” he said. “Better late then never. India will never allow the BJP/ RSS to capture our institutions.”
Former Finance Minister P Chidambaram urged the government and the RBI to work behind closed doors to resolve their differences, according to Bloomberg. “I think the matter is serious enough and it will be best if the RBI and the government don’t talk across each other through lectures – we have had two already,” Chidambaram said. “It might be better if the time-honoured practice of the finance minister and the governor of the RBI meeting often in private and talking issues.”
Meanwhile, the All India Reserve Bank Employees Association backed Acharya, saying “undermining the country’s central bank was a recipe for disaster which the government must desist”, reported NDTV. “Let the two talk and sort out the issues instead of the government trying to ride roughshod over the RBI, what they are trying at the expense of the nation,” their statement said.