The RBI Vs North Block Tug Of War

Discontent brews between the RBI and the government as the central bank stamps its independence through policy prescriptions on critical economic issues

- Shweta Punj

WHAT DID THE RESERVE BANK OF INDIA (RBI) ADVISE THE GOVERNMENT on demonetisation? Whatever the counsel, the verdict on its success or failure is out in the central bank’s annual report released on August 29. It states that 99.3 per cent of the demonetised notes, worth Rs 15.3 lakh crore, have returned to the banking system. The report is a major embarrassment for the government, for it had argued that demonetisation was a bold move towards a less-cash economy and would widen the tax base and serve as a blow to terrorism and black money. Demonetisation rendered 86 per cent of India’s currency illegal and left the RBI struggling to cope with the aftermath. Ill-prepared to deal with a policy transition of this scale, the bank kept announcing measures and then revoking them and was vilified as the ‘Reverse Bank of India’. This was perhaps the beginning of the RBI’s rocky relationship with the finance ministry. Two years on, the split between the two arms of economic policy making is out in the open.

In June 2018, when Piyush Goyal, then acting Union finance minister, met economists and market traders at the Maharashtra government guesthouse in Mumbai to discuss how to lift the economy to 10 per cent growth, he began with a caveat—anything could be suggested as long as it didn’t involve the RBI. When the issue of rising interest rates came up, he again said that, on concerns such as these, it was the RBI that needed to be approached. To those attending the meeting, this was indicative of the stressful dynamic between the RBI and the finance ministry. Now, the latest move of appointing Swadeshi Jagran Manch co-convenor and RSS ideologue S. Gurumurthy to the RBI board is being viewed as a desperate attempt by the government to bring the central bank on the same page on key economic issues, especially the availability of capital to medium and small scale enterprises (MSMEs).