The Reserve Bank of India’s board of directors met on Monday amid speculation that the Centre has proposed a change in rules that will enable it to supervise the central bank better, NDTV reported. The meeting lasted nine hours, at the end of which the board decided on having an expert panel set up jointly by the government and the central bank to examine the economic capital framework to decide on matters related to the RBI’s surplus reserves.

Modi will attempt to destroy RBI today: Rahul Gandhi

Ahead of the meeting, Congress President Rahul Gandhi claimed that Prime Minister Narendra Modi will attempt to destroy the RBI through his “puppets” in the board of directors on Monday. “Modi and his coterie of cronies, continue to destroy every institution they can get their hands on,” Gandhi tweeted. “Today, through his puppets at the RBI board meet he will attempt to destroy the RBI. I hope Patel and his team have a spine and show him his place.”

Former Finance Minister P Chidambaram claimed on Sunday that the Centre is trying to “capture” the RBI to control its reserves. The meeting of the RBI’s Board of Directors on Monday will be a “day of reckoning” for the central bank’s independence and the Indian economy, Chidambaram tweeted on Saturday. “Nowhere in the world is the central bank a board-managed company,” the Congress leader added. “To suggest that private business persons will direct the governor is a preposterous idea.”

The standoff

The meeting was held amid a tussle between the government and the RBI, with speculation that the Centre has proposed a change in rules that will enable it to supervise the central bank better. The government has also appointed three directors on the RBI board – S Gurumurthy, Subhash Chandra Garg and Rajiv Kumar. On November 15, Gurumurthy, co-convener of the Rashtriya Swayamsevak Sangh economic wing called Swadeshi Jagaran Manch, said that the standoff between the RBI and the Centre was “not a happy thing”.

The tussle between the central bank and the government began to come out in public with remarks made by RBI Deputy Governor Viral Acharya in a speech on October 26. Acharya said governments that do not respect a central bank’s independence sooner or later incur the wrath of financial markets. Three days later, Reuters reported that the Centre was upset with the RBI for publicly talking about the rift. A news report then claimed that the government had sought Rs 3.6 lakh crore from the central bank’s reserves – though Economic Affairs Secretary Subhash Chandra Garg dismissed the claim.

Apart from the bank’s reserves, the Centre is concerned about the central bank’s lending instructions on banks, many of which have huge debts. The RBI has barred 11 state-run banks from lending. The government also wants the central bank to allow banks to lend more to non-banking financial companies and the micro, small and medium enterprises sector.

There was speculation that the Centre may invoke – or may already have invoked, according to some reports – the Section 7 of the RBI Act, which empowers it to issue instructions to the bank. The government responded to the reports, not making any comment on the claim itself, but with the statement that the central bank’s autonomy is essential. Some reports suggested that RBI Governor Urjit Patel may resign if the government forces his hand.

In an interview to CNBC-TV18 earlier this month, former Governor Raghuram Rajan said the rift can be resolved only if both sides respect each other’s intent and autonomy.