Explainer: Why the RBI and the central government are in a public spat

It’s not the first time that the Reserve Bank of India has had a run-in with the Centre, and it certainly won’t be the last. However, simmering tensions came to a head on October 26, when RBI Deputy Governor Viral Acharya, speaking at the A D Shroff Memorial Lecture in Mumbai, made a scathing statement against the government.

“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,” he said. During his speech, he said in terms of decision-making, the government’s horizon was that a T20 cricket match, while that of the RBI’s was a test match. "The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions," he said. The All India Reserve Bank Employees Association backing Viral, said, “undermining the country's central bank was a recipe for disaster which the government must desist."

This did not go down well with the Centre, who said that they were ‘upset’ that the RBI publicly spoke about the rift. On Tuesday, Arun Jaitley responded, and held the central bank responsible for mounting bad loans, and said the Reserve Bank looked the other way when banks lent indiscriminately during 2008-14 to keep the economy going. “I am surprised that at that time, the government looked the other way, the banks looked the other way. I don't know what the central bank was doing. It was a regulator of these. They kept pushing the truth below the carpet,” he said.

Following the public rift, the government has reportedly invoked Section 7 of the RBI Act, which has never been used in independent India. Under this, the Centre can hold a consultation with the RBI Governor and issue directions in matters of public interest.

There's no official confirmation, but a letter has reportedly been sent. If it's actually invoked, it could undermine the RBI’s autonomy and RBI Governor Urjit Patel reportedly may step down.

On Wednesday, in a statement, the government said, "The Government, through these consultations, places its assessment on issues and suggests possible solutions. The Government will continue to do so."

But what caused Viral to make the comment? Here are some of the issues over which the Centre and the RBI have differing points of view:

• Payment Regulatory Board: Centre made a proposal for an Independent Payment Regulatory Board (PRB) to oversee all payments in the country. This is presently under the RBI. Arguing against the Centre’s proposal, the RBI had said, “The digital payments have made good and steady progress. India is gaining international recognition as a leader in payment systems. Given this, there need not be any change in a well-functioning system.
• Relaxation of lending norms: Non-official directors of the central banking institution have been demanding a slackening “MSME forbearance” (micro, small and medium enterprises). Essentially, they want to ease non-performing asset norms and relax lending norms for MSME companies.
• Prompt corrective action (PCA): 11 public and 1 private bank in the country have been placed under what is called a PCA framework — rules the RBI puts in place for weaker banks — which bars lending by these banks, among other things, until they strengthen their capital base. The government believes that easing restrictions will boost lending and increase growth.
• Public sector banks: Following the Nirav Modi-Punjab National Bank case, the RBI and Centre began pointing fingers at each other. The Centre, in an indirect attack, said that it was worrisome that no red flags were caught. “Regulators have a very important function. Regulators ultimately decide the rules of the game and regulators have to have a third-eye which is to be perpetually be open,” Arun Jaitley had said in February. “But unfortunately in the Indian system, we politicians are accountable, the regulators are not,” he had said. In response, RBI Governor Urijit Patel had blamed regulatory constraints as the RBI’s powers to regulate public sector banks is limited.