In case you have not been keeping up with the bickering between the RBI and the Government, Ira Duggal gives you a primer. “Reserve Bank of India Governor Urjit Patel and his team have now come out at least four times to defend their policies through public speeches. While these speeches have helped explain the viewpoint of an otherwise reticent central bank, they also suggest that more amiable lines of communication between the government and the RBI are jammed.”
There seem to be 3 faultlines along which the squabbling is taking place:
(a) Every time a big bank fraud emerges (which is usually every month) or NPAs start swelling again, someone influential in New Delhi gives a comment to the media along the lines of “how could this happen…what was the RBI doing?”
(b) Whenever the RBI increases the voltage on NPAs (by forcing banks to recognise NPAs promptly), New Delhi tries to jam the move.
(c) Whenever there is a need felt to juice up economic growth or to increase system liquidity, New Delhi starts talking about why the RBI should relax the “Prompt Corrective Action” framework that it has applied to 11 PSU banks, thus prohibiting them from expanding their balance sheet.
Finally, like a teenager fed up of being upbraided by out-of-touch parent, the RBI let rip last week openly highlighting some of the areas where the government is attempting to impinge on central bank 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’ said Viral Acharya, Deputy Governor, RBI. Apart from concerns over banking regulation, Acharya highlighted the government’s attempt to withdraw capital and reserves from the RBI’s balance sheet. The speech, while given by Acharya, had the full backing of Governor Patel, suggesting the message was going from one institution (the RBI) to another (the government).”
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