RBI vs Modi Government: Will the tussle end in November 19 board meeting?

The ongoing friction between the Central government and the Central bank of India is making headlines for all the wrong reasons. However, many believe that the tussle is likely to end in November 19 board meeting, if not completely at least the Government and the RBI might reach at some common ground. 

The friction between the North Block and the banking regulator came under public glare when for the first time, the RBI published a dissent note on its website, expressing its disagreement with the government in setting up a separate payments regulator.

It further widened after RBI's deputy governor Viral Acharya had made a strong case for the need of autonomy at the country's central bank -- his speech had been widely shared on social media. Citing sources, Reuters reported that the government officials are very upset with the RBI for making the rift public. 

And with reports that the Centre has asked the RBI to transfer a surplus of Rs 3.6 lakh crore, more than a third of the total Rs 9.59 lakh crore reserves of the central bank, to the government the tensions between the two rose. However, later on the goverment denied of any such demand. 

But all eyes are set upon the November 19 RBI board meeting. The 18-member board does not only contain central bankers and government officials but also business leaders, economists and activists.

Going by the public utterances of the RBI and government officials so far, the contentious issues are how to manage the huge surplus the RBI has accumulated, how should it deal with errant lenders and borrowers amid a persisting bad loan crisis and what could be the 'public interest' for the government to dictate directions so that it is not seen as an attack on the central bank's autonomy.

As per the RBI website, its central board currently has 18 members, though the provision is that it can go up to 21.

The members include Governor Urjit Patel and his four deputies as 'full-time official directors', while the rest 13 have been nominated by the government, including two Finance Ministry officials -- Economic

Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar.

There are also Swadeshi ideologue Swaminathan Gurumurthy and cooperative banker Satish Marathe, nominated by the government as "part-time non-official directors".

The entire board is appointed by the government under the RBI Act, which mandates the central board with "general superintendence and direction of the Reserve Bank's affairs".

The government can nominate 10 'non-official' directors from various fields and two government officials. The four non-official directors are one each from the four regional boards of the RBI.

Meanwhile, according to a report in Mint, the Union government will not yield ground on its right to issue a directive to the RBI. The report also quoted a person close to the development, “There is complete clarity in the government that it has the right to issue a directive. This clause exists for all Acts defining the role of the regulator,” he told the newspaper. 

What does Section 7 states? 

Section 7 says that ‘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’, a statute that has not been used in independent India. 

Anothe report in the media also claimed citing sources that the RBI might have agreed to explore a loan restructuring package for small and medium enterprises It further stated that the RBI would consider reviewing the prompt corrective action (PCA) rules for banks which have shown some improvement in financials as on September 30. 

Whatever happens will come into light soon, however, if initial media reports are to be believed then RBI might consider government's suggestion to finally end the friction between the two.