July 06 2020
Sour notes in ties with Centre
11 December 2018

Centre referring to Section 7 of the RBI Act is seen as the final blow in the stormy relationship

The government had appointed Urjit Patel as Reserve Bank of India (RBI) Governor after his predecessor Raghuram Rajan’s tenure ended. With Dr. Patel’s appointment in September 2016, it was believed that the ties between the Centre and the RBI would improve.

However, the relationship showed signs of stress just after demonetisation, when the RBI faced strong criticism for failing to tackle the fallout of currency shortage. The RBI annual report of 2016-17, for the first time, officially indicated that all the cash had come back to the system, which was read as a major blow to the government. The Centre, however, had claimed the demonetisation exercise a success.

Things turned worse earlier this year after the RBI issued a circular withdrawing all existing loan restructuring mechanism and asked the banks to make higher provision for loans even if there is a one-day delay in repayment. This had not gone down well with the North Block officials as they lobbied hard with the central bank to withdraw the order.

According to RBI sources, Dr. Patel was convinced that the move was essential for cleaning up the banking system, and, hence, he did not entertain any request to withdraw the circular.

The situation worsened when the government, in an unprecedented manner, terminated Nachiket Mor’s term in the RBI board. The move to appoint some board members was also seen as the government’s effort to influence the RBI through the board.

The fact that the government was trying to have a say in RBI matters through the board became obvious in the stormy October 23 board meeting which lasted about eight hours. Even after the marathon discussion, no solution could be reached.

The Centre referring to the never used Sec. 7 of the RBI Act for consultation on several issues was seen as the final blow in the souring relationship. Transfer of the RBI capital to the government, governance of central bank, liquidity to sNBFCs, and debt recast for MSMEs were among the contentious issues. While some middle ground was found in some issues such as capital and MSMEs in the November meeting, the other issues were scheduled to be discussed in the board meeting on December 14. However, Dr. Patel has chosen to call it a day, just days before the next board meeting.



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