2018 saw a bitter battle between the Reserve Bank of India (RBI) and the central government, and the resignation and subsequent appointment of a new RBI governor merely signals a cease-fire. If the appointment of RSS thinker S Gurumurthy to the board of the RBI signaled the start of this battle, the resignation of Urjit Patel may not be the end, as many think it is.
Several global rating agencies including Moody’s , Fitch Solutions and S&P Global flagged off concerns about the events leading up to the resignation of Patel and said any pressure on the autonomy of the central bank would be seen as credit negative. But finance minister Arun Jaitley has brushed aside apprehensions of RBI's autonomy being under threat.
“I cannot conceive how an elected sovereign government bringing to the notice of the RBI the issue of credit and liquidity could infringe its autonomy in any way..“... (its) because we respect the autonomy of the central bank, we tell them (that) these are the problems the market is facing.." said Jaitley, in a recently speech at the FICCI AGM.
But the rift has existed for months now. The abrupt removal of Nachiket Mor — one of the strongest voices on the board of RBI and a close associate of former governor Raghuram Rajan — may well have been tipping point. But matters came to a head sometime in early October, when the government started consultations with the central bank under the never-before used Section 7 of the RBI Act to force down decisions it wanted the regulator to take. From liquidity to easing of prompt corrective action norms to tweaks in the Feb 12 circular on bad loans, the government wanted several changes in regulations that the RBI was unwilling to make.
Tensions came to fore during the October 23 board meeting of the central bank, which lasted for over nine hours, and ended inconclusively with not a single resolution passed. People in the know pointed out that among all the other demands made, the government asking the RBI to hand over its surplus reserves by making changes to the "economic capital framework" was a big sore point.
What followed was a very public spat. On October 26, deputy governor Viral Acharya delivered a strongly worded speech at the A.D. Shroff Memorial Lecture in Mumbai, warning the government of catastrophic consequences if RBI's independence was curbed. He compared the government’s “horizon of decision-making” to a T20 match that had the elections and other objectives in mind. In contrast, he said the central bank’s approach was like that of a test match, with a focus on long-term economic stability. "The government that does not respect their central bank's independence would sooner or later incur the wrath of financial markets, ignite economic fire and come to rue the day they undermined the regulatory institution," he said.
Former RBI governor Rajan backed Acharya, and warned that unhealthy disagreements between the union finance ministry and the RBI should not escalate further. “The RBI is something like a seat belt. As a driver, the driver being the government, it has the possibility of not putting on a seat belt but of course if you do not put on your seat belt you get into an accident and the accident can be quite severe,” he told CNBC-TV18 in an interview on November 6.
Viral Acharya was not the only deputy that spoke out against pressures from the government. Three days later, deputy governor NS Vishwanathan delivered a speech in Jamshedpur, hitting back at the government’s demand for capital relaxations and increasing credit flow to borrowers easing liquidity. He said, “It is not that banks have a huge coffer like that of Uncle Scrooge from which they make loans, but it is funds they raise through deposits that are used for making loans. Banks are not supposed to be shock absorbers of the first resort for difficulties faced by their borrowers as they do not have the luxury of delaying payments to their depositors.”
On the government's demand to relax prompt corrective action norms, he said, “We must guard against any push for dilution of standards in the name of aligning them with international benchmarks because that will be cherry-picking and will result in our banks being strong in a make-believe sense and not in reality.”
This war of words prompted the Finance Ministry to issue a statement on October 31 to calm the markets, especially the free falling currency. The statement read:
"The autonomy for the Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this. Both the Government and the Central Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy. The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so.”
Bland as the statement was, it signaled an uneasy truce. But it was short-lived. Taking advantage of a rally in emerging Asian markets that led to a recovery in rupee, crude prices, DEA Secretary Subhash Chandra Garg was quick to send a retort back at DG Viral Acharya, tweeting, "Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4% during the week and bond yields below 7.8%. Wrath of the markets?"
Garg’s tweet on November 9 finally confirmed that a change in the capital framework of RBI was under discussion, “Lot of misinformed speculation is going around in media. Government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer 3.6 or 1 lakh crore, as speculated…Only proposal under discussion is to fix appropriate economic capital framework of RBI."
RBI's central board meeting on November 19 took place amid rumours that governor Patel would resign. The meeting ended on a stalemate. While the capital requirement for banks was left unchanged, the government got its way with the board agreeing to set up a committee to look into the RBI's capital reserves. Through all this, governor Patel maintained his silence -- even at the monetary policy press conference on December 5.
And just when everyone thought tensions were beginning to subside, Urjit Patel resigned from his post on December 10, citing personal reasons. While governance reforms at RBI including the role of the government, central board, governor and the committees of RBI, was the main agenda for December 14 board meeting initially, the resignation took the government by surprise, and the issue has virtually been buried for now.
Within 24 hours of Patel's resignation , the government named former DEA and revenue secy Shaktikanta Das as the 25th governor of the RBI. The day Das took charge as governor, he assured the markets of RBI's continued autonomy and independence, saying, "The government is not just a stakeholder ... the government of the day runs the economy ... and manages major policy decisions. So there has to be a free, fair, objective and very frank discussion between the government and the Reserve Bank of India. And I would like to believe that all issues, however contentious, can be resolved through discussions."
Shaktikanta Das, who is a seasoned bureaucrat and a veteran of the Finance Ministry, is known to be an amiable person, in contrast to his rather reserved predecessor. His merits are many, but so are the challenges. An immediate task at hand as he takes over will be to mend the severed ties between the government and the regulator. But the bigger challenge yet — for a governor seen as the government’s man — will be to battle prejudices, not only to win the confidence of his colleagues at RBI but also of the markets at large.