RBI board meets today with new worries emerging over its independence

India’s central bank board will meet on Friday with much of the hostility of the past two months with the government having eased, and new worries emerging about the institution’s independence.

Prime Minister Narendra Modi has a new ally at the Reserve Bank of India in Governor Shaktikanta Das, who may be more amenable to the government’s requests to ease lending restrictions on state-run banks and hand over more of its capital to the state. Das, 61, took office two days after Urjit Patel abruptly resigned as governor on Monday.

The 18-member board, which includes monetary policy makers, finance ministry representatives and industrialists, is expected to discuss a proposal by the government for closer supervision of the central bank. Such a move may erode investor confidence and have a bearing on the credit rating of one of the world’s fastest-growing major economies.

Easing lending restrictions on some of the nation’s weakest state-run banks will also be discussed. It was originally broached in October by the board then led by Patel. At a meeting in November, the central bank had agreed to form a panel to study its capital structure.

No Fireworks

“I don’t think there will be any fireworks,” Raghbendra Jha, an economics professor at the Australian National University, said, referring to the Patel-era tussle with the government over the institution’s autonomy. “Personal frictions between the main actors -- now that doesn’t exist.”

That view was echoed by Swaminathan Gurumurthy, a Hindu nationalist and journalist appointed by the Modi government as an independent board member in August. He backed the new governor’s conciliatory approach to the government.

Inside the board, Gurumurthy offered resistance to Patel. Pressure from the government had prompted Viral Acharya, the deputy governor in charge of monetary policy, to caution the government of a market backlash should the central bank’s independence be undermined.

“I don’t know if the relationship is good or not, but we have to have stakeholders consultation,” said Das, who was Modi’s key lieutenant when he unveiled his controversial plan to invalidate 86 percent of the currency notes in late 2016.. “The government is not just a stakeholder but also runs the country, economy and manages major policy decisions.”

That line of thought found endorsement from Finance Minister Arun Jaitley.

The government having a view that’s different from the central bank’s is “not a confrontation,” Jaitley said on Thursday. “If the government of the day is not able to convey difficulties in the system it will be failing in its duty.”

Tight Leash

The central bank has so far kept a tight leash on liquidity, restricted some weak banks from lending and refused to bailout the shadow banking sector. The latter had been at the forefront of new lending in the past three years, which in turn fueled domestic consumption and economic growth.

Modi is keen to keep growth going ahead of a national election early next year and as recent data showed the economy’s expansion may be under threat. Gross domestic product growth in the three months to September slowed to 7.1 percent from the 8.2 percent pace seen in the previous quarter.

The new governor has said supporting growth is very much part of the RBI’s mandate, a sharp contrast from his predecessor who stuck to the central bank’s inflation-targeting mandate. Das’s comments stoked a rally in sovereign bonds, which extended gains for a third day Thursday on speculation the RBI will shift to a neutral policy stance from the current hawkish bias.

“With Das at the helm, we now think the RBI will call a halt to the tightening cycle,” Shilan Shah and Mark Williams, economists at Capital Economics, wrote in a note. “We no longer expect a rate increase at the next meeting in February.”

While that might provide short term relief to investors, the chief worry remains: how much ground will the RBI cede?