Govt and RBI must resume consultations, instead of airing their differences

Independence of RBI as a regulator is vital and this can be easily undermined by such public display of differences

Last weekend, top officials in North Block, headquarters of the finance ministry, could not have had a peaceful sleep. Indeed, even senior officials in the Prime Minister’s Office must have been a little perturbed. The reason was a hard-hitting speech delivered last Friday by the deputy governor of the Reserve Bank of India, Viral Acharya.

Delivering the A D Shroff Memorial Lecture in Mumbai, Acharya said that in order to secure greater financial and macroeconomic stability, the RBI must have effective independence in its regulatory and supervisory powers over public sector banks, its balance-sheet strength and its regulatory scope. “Such endeavour would be a true inclusive reform for the Indian economy’s future,” he said. In a different context, Acharya even warned that “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets and ignite economic fire”.

There is little doubt now that the relations between the RBI and the Union government remain fraught. Neither the government, nor the RBI brass is keeping that hush-hush any longer. Most governments in the past have had differences of opinion with their RBI governors on matters of economic policy. But those differences were by and large limited to internal communication. What one now sees is an open display of those sharp differences.

Earlier, for instance, North Block and the RBI differed on the schedule of the government’s borrowing programme, causing mayhem in the bond market, spiking yields of government securities and imposing avoidable costs on those who held them. In the run-up to the 2018-19 Budget, too, there were differences between the government and the RBI over the quantum of dividend that the central bank should be paying to the exchequer.

Things took a turn for the worse in March 2018. In less than a month of Finance Minister Arun Jaitley mildly ticking off the central bank for its role in the Punjab National Bank scam, RBI Governor Urjit Patel came out with a strong explanation on how he had little power to discipline the top management of public sector banks and why the government needed to fix that problem by amending the relevant law. That was perhaps the first public display of the government and the RBI airing their differences. The government responded through a Parliament reply on July 24. It stated that “the powers of the RBI were wide-ranging and comprehensive to deal with various situations that may emerge in all banks, including public sector banks”.

More instances of differences have surfaced since then. For instance, the government has often expressed its view on how the RBI should relax the enforcement of norms for recognising stressed assets, particularly in the power sector. The RBI has rightly declined to heed such requests. The government has sought a review of norms for prompt corrective action (PCA) by banks in case their stressed loans have exceeded a specified limit so that these could be given access to fresh capital. The RBI, once again for prudential reasons, has resisted such moves.

Early this month, the government put out its views on the new regulatory structure for payments systems, thereby proposing to dilute the role and powers of the RBI in the proposed regulatory architecture. The RBI lost little time in making public its strong dissent note in the report of the committee that was set up to recommend the new structure of the financial payments regulator.

Even the Comptroller and Auditor General of India, Rajiv Mehrishi, chose the occasion of inaugurating the Indian School of Public Policy on October 24 to question why the RBI failed to rein in the non-performing loans problem of banks. “Nobody is asking the real question that what actually the regulator was doing… and whether it is accountable or not,” Mehrishi, a former finance secretary, said while referring to the banking crisis.

It is possible that the RBI’s misgivings about the government may have been fuelled by other factors as well. For instance, Nachiket Mor’s four-year term as a member of the RBI’s central board was cut short early this month. In recent board meetings, government nominees have often made proposals that are as trivial as switching over to using lakhs and crores, instead of the current practice of using millions and billions.

But there is no denying that the increasing frequency with which representatives of the RBI and the government are airing their differences is not a healthy sign as they put the regulator under unnecessary pressure. The RBI is an important and critical institution to ensure financial sector stability. Its independence as a regulator, too, is vital and this can be easily undermined by such public display of differences. Instead of blaming each other, the government and the RBI should engage in consultations to understand what their respective viewpoints are. But consultations can begin if the government’s political leadership brings both the RBI brass and finance ministry top secretaries to a table so that they can start talking to each other, instead of talking at each other. Trying out Jaitley’s suggestion that regulators should engage in more wide-ranging consultations with all stakeholders could be a starting point.