Ministry Of Finance Versus RBI

Short of shouting from the rooftops, Reserve Bank of India (RBI) officials and the government have made their animosity against each other quite explicit.

- Shweta Punj with M.G. Arun

The unspoken has been spoken. No words have been minced. The unexpected has happe­ned and no one seems to know where will it go from here. The uncertainty is mak­ing markets and industry anxious, even as the RBI and Union ministers take to pub­lic platforms to settle scores.

On October 26, RBI deputy governor Viral Acha­rya used a lecture to launch a scathing attack: “Govern­ments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution...” His indictment echoed across the markets and the corridors of power. Discontent between the RBI and North Block had been brewing for nearly a year but “Viral’s speech changed the whole picture”, says a macro­ economist who advises foreign investors on the India story.

A source at the RBI board meeting on October 23 says Acharya, much to the shock of the members present, de­clared that the Prompt Cor­rective Action (PCA) norms were not brought up for dis­cussion before the board as they would not have cleared it. The member, requesting anonymity, said “the RBI is asking for independence from the board”.

A minister in the Modi government, not wanting to be named, expressed deep disappointment at the RBI’s ham­ handed approach. Ob­servers say that while there was always some tension between the two policy mak­ing arms of the government, for it to have reached this pass took sustained pressure on the RBI over the past year or so on a host of policy deci­ sions. Government sources say on assuming office, the RBI governor had agreed to revisit the provisioning norms, reduce interest rates, extend more support to MSMEs, but didn’t come good on the commitments.