Amid rift and autonomy, will the RBI governor resign?

Last Updated: Wed, Oct 31, 2018 17:12 hrs
Dr Urijit Ravindra Patel

A growing rift between the Centre and the Reserve Bank could result in the Governor resigning. Reports on Wednesday speculated Dr Urjit Patel could step down. Reports inferred this as his last recourse after taking cues from Deputy Governor Viral Acharya's comments made as part of a lecture during last Friday.

Speculators also considered the narrative built by Finance Minister Arun Jaitley in a public comment on Tuesday for their conclusion on a probable resignation.

The FM on Tuesday had lashed out on the RBI for failing to control spiraling NPAs.

On Wednesday, front page reports on both the Times of India and Economic Times said that the Government invoked Section 7 of the RBI Act, 1934. The article implies that the invoking of the act was akin to the Finance Ministry dictating its terms to the Governor. This, the reports said could be viewed as an obstruction of the Governor's duties.

Section 7 of The RBI Act

There have been no references in history of invoking the Section 7 of the RBI Act, 1934. The act empowers the Central Government to issue directions to the central bank. "The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest," reads Section 7(1) of the RBI Act.

"Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank," reads sub-section under section 7.

Section 7(3) reads,"Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank."

Growing Discontent:

The nature of public discourse between the RBI and the Finance Ministry may suggest brewing discontent between the two. Last Friday, Deputy Governor Viral Acharya delivered a public lecture to claim the independence of the public institution. The FM on Tuesday retorted back blaming the RBI responsible for rising NPAs.

CNBC TV-18's report too spoke of the growing discontent. A report from the agency said there was an "irreversible breakdown" between the RBI and the Government. It added that the the RBI was mulling all available options, which also included the probability of the Governor stepping down. The report reasoned that a meeting of regulators such as IRDA, SEBI, RBI with the Finance Ministry on October 30 added to discontent in the RBI.

The agenda of the FSDC (Financial Stability and Development Council) meeting held on Tuesday was to deliberate on issues faced by non-banking financial companies. Key on the agenda was the aspect of liquidity in NBFCs. According to a PTI story, the governor along with four deputy governors including Viral Acharya had attended the meeting. And the RBI maintained that there was no liquidity concern in the NBFC sector.

It is widely speculated that the government keen to clear IL&FS' mess may have asked the central bank to allow banks to infuse fresh funds in the sector. But then the Finance Minister on Tuesday was quoted as blaming the RBI for failing to stop banks from a lending spree between 2008-14. He said that the banks have incurred huge debts.

Besides the invoking of section 7, CNBC TV18's Latha Venkatesh added that there could have been factors that had caused an "irreversible breakdown". Other reasons include the government's insistence on a need for a separate regulator for payments, state-run banks in RBI's PCA (prompt corrective action) list being asked to lend more. Also, the RBI's sharing of decades of its contingency corpus, an issue that has been ongoing for almost two years has been speculated as top factors.

Viral Acharya, the Deputy Governor's speech delivered on last Friday may have been the tipping point. Speculatory media reports drove the point of a simmering tension by reading between the lines of the DG's speech. Excerpts from Acharya's speech:

No analogy is perfect; yet, analogies help convey things better. At times, a straw man has to be set up to make succinctly a practical or even an academic point. Occasionally, however, real life examples come along beautifully to make a communicator's work easier. Let me start today with an antecedent from 2010 as it is particularly apposite for the theme of my talk:

"My time at the central bank is up and that is why I have decided to leave my post definitively, with the satisfaction of my duty fulfilled," Mr Martin Redrado, Argentina's central bank chief, told a news conference late on Friday, January 29, 2010."

"We have arrived at this situation because of the national government's permanent trampling of institutions," he said. "Basically, I am defending two main concepts: the independence of the central bank in our decision-making process and that the reserves should be used for monetary and financial stability."

"A central bank performs several important functions for the economy: it controls the money supply; sets the rate of interest on borrowing and lending money; manages the external sector including the exchange rate; supervises and regulates the financial sector, notably banks; it often regulates credit and foreign exchange markets; and, seeks to ensure financial stability, domestic as well as on the external front."

"A government's horizon of decision-making is rendered short, like the duration of a T20 match (to use a cricketing analogy), by several considerations. There are always upcoming elections of some sort – national, state, mid-term, etc. As elections approach, delivering on proclaimed manifestos of the past acquires urgency; where manifestos cannot be delivered upon, populist alternatives need to be arranged with immediacy. Less important in the present scenario, but only recently so, wars had to be waged, financed and won at all costs. This myopia or short-termism of governments is best summarized in history by Louis XV when he proclaimed "Apres moi, le deluge!" (After me, the flood!).

"In contrast, a central bank plays a Test match, trying to win each session but importantly also survive it so as to have a chance to win the next session, and so on. In particular, the central bank is not directly subject to political time pressures and the induced neglect of the future; by virtue of being nominated rather than elected, central bankers have horizons of decision-making that tend to be longer than that of governments, spanning election cycles or war periods."

"As many parts of the world today await greater government respect for central bank independence, independent central bankers will remain undeterred. 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; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of international investors, and longer life spans."

Needing Attention:

TV journalist Latha Venkatesh's editorial in CNBC TV-18 needs a special mention. In her blog she speaks of two issues that needs the nation's attention. The first is the government's demand of that the RBI's reserve fund be transferred to the state. This amount runs to an estimated Rs 2.5 lakh crores which is years of profits that the RBI has made. She says that decision of parting with the RBI's corpus fund accumulated over two-three decades need not be pursued.

Secondly, after demonetization banks that had been flush with deposits ended up lending to non-banking financial companies. The NBFCs in turn invested in real estate and infrastructure sector. With issues of slow growth in real estate and NBFCs, it may be the public' money invested in banks that could take a hit. An independent central bank could pave the way for better credit approvals and rational lending practices.

Options on Table

Market forces react with volatility to even unconfirmed news reports on a governor's departure. The Rupee breached the 74 mark barely hours of the speculative report that spoke of Governor Patel's probable resignation.

Markets reacted with volatility when Patel predecessor Raghuram Rajan stepped down. With General Elections barely six months away, the government may not want to enter election mode with market volatility.

Amid calls of rift and speculations, one wonders if the Governor is indeed stepping down? The RBI's press-release so far states nothing on that. A statement from the Department of Economic Affairs (DEA), meanwhile has supported the RBI's autonomy.

According to unconfirmed sources an official meeting of the RBI board is being planned on Nov 19. The meeting has been called by the Governor.

There is utmost eagerness to understand the contents of this meeting, but until then the bigger question that will looms large is will the RBI governor step down? If not, what options will the central bank be considering?

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