Rift between Government of India and Reserve Bank of India

From the past couple of months there has been a visible rift between the Government of India and Reserve Bank of India. Reports suggest that Government has invoked section 7(1) of the Reserve Bank of India Act. According to the act, the government has the power to direct the RBI to follow its instructions in the matter of public interest.

Following are the major issues that have led to the rift between RBI and GOI:

  • Interest rates: One of the constant reason for the rift between both the parties has been interest rates. While the government wants to keep the rates lower, the inflation focused RBI has not been cutting the rates and has been raising them. During August, RBI raised the interest rates back-to-back. For the first time in five years there has been consecutive rate hikes to curb inflation and pre-empt a rout of the rupee.
  • NPA classification: In February, RBI’s reclassification of Non-Performing Assets (NPAs) and loan restructuring norms was yet another reason for the rift. A 180-day deadline was set for loans to be categorized as an NPA. RBI ordered all banks to consider large accounts above Rs 2,000 crores as bankrupt if resolution plan wasn’t met in 180 days. The government considered this move to be very harsh.
  • PNB Scam – Nirav Modi: With a 14,000 Crore PNB scam coming into light, the government blamed RBI for lack of supervising banking operations. While the RBI governor openly stated that the PSU banks were being shielded by the government.
  • NBFC – IL&FS Default: A similar tussle between the RBI and GOI was witnessed in the NBFCs issue. After the default in repayments by IL&FS the government insisted RBI on providing relief to NBFCs for the cash crunch they were facing. While the RBI refused to do so and it also opposed the government’s demand for greater dividend from banks
  • Mor’s removal: In September, Nachiket Mor was removed from the RBI board without formally informing him. He had more than two years before his term was to end. His voice against the government’s demand for higher divided seems to be linked to his removal.

Time for Truce

In November, GOI and RBI decided to meet and come to a common ground on the issues that have been creating the rift between the two entities. Post a nine-hour marathon board meeting, consensus was arrived on capital adequacy of banks. While expert committee to be appointed for two contentious issues of transfer of surplus reserves and relaxing norms for weak banks.

Post the meeting, threat against invoking the Section 7(1) of the Reserve Bank of India Act seems to have been passed.

Capital required by RBI or the Economic Capital Framework in different risk scenarios has been a sore point. This fixation would help the government in meeting it fiscal deficit targets. While the bank says that these reserves play a crucial role during crisis times.

The board did not yield to demands of bringing down the capital adequacy ratio in line with bare minimum levels prescribed by Basel III norms.

The easing out of Prompt Corrective Action (PCA) framework for weak banks has been assigned to a committee.

There was no consensus arrived for the liquidity shortage faced by the NBFCs. RBI announced that it would inject Rs 8,000 Crore liquidity through open market operations.

During their next meeting on December 14th, the first since Shaktikanta Das took over as governor of the RBI there weren’t any controversial decisions made. Though the board has discussed the issues, no concluding outcomes have been announced.

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