Tensions have escalated recently, with media reports claiming the finance ministry has initiated a discussion under Section 7 of the RBI Act, 1934, which empowers the government to issue directions to RBI governor; finance minister Arun Jaitley, however, denied the charge
New Delhi: Amid the ongoing tiff between the government and the central bank on a range of issues including autonomy, Prime Minister Narendra Modi reportedly met Reserve Bank Governor (RBI) Urjit Patel on Friday.
Sources said the prime minister wanted to have a first-hand account and hear Patel’s side of the story and explain him his government's perspective, PTI reported.
The differences between the central bank and the government first became public last month after RBI Deputy Governor Viral Acharya said that undermining the central bank's independence could be "potentially catastrophic".
The coming week, the RBI board is expected to meet and reaccess a loan restructuring package for small and medium-sized businesses, and reviewing lending curbs on some banks. The RBI has barred 11 state-run banks from lending.
A few experts feel the November 19 meeting will be a test for how much power the RBI board wields and its influence in decision making.
What are the issues
Before going to polls in 2019, the government wants more money from the RBI reserves to help fund the fiscal deficit. But so far the RBI has not obliged and has argued the policies will help preserve long-term financial stability.
The Centre wants RBI to relax the prompt corrective action (PCA) framework under which as many as 11 public sector banks are placed now due to enormous stressed assets. The government says the stringent norms hurt credit growth.
Differences over interest rates are also a factor. While the RBI believes it should have sole responsibility of raising or lowering key interest rates to keep inflation in check, the government has expressed displeasure over the RBI increasing interest rates.
The government has sought a special refinance window for mutual funds, NBFCs and housing finance companies
The Opposition has targeted the government for putting pressure on the RBI board to get its way. It has alleged that the government, facing huge fiscal deficit in an election year, had demanded Rs. 1 lakh crore from the reserves of the central bank.
Former finance minister P Chidambaram has said that the government is trying to put pressure on the RBI governor as the board full of pro-government members. However, there is no clarity on whether the board can dictate terms to the RBI.
The 18-member board includes Patel and four deputy governors, economic affairs secretary SC Garg and financial services secretary Rajiv Kumar apart from several nominees such as Tata Sons chairman N Chandrasekaran; former M&M finance head BN Doshi; former Gujarat chief secretary Sudhir Mankad; former chairman of the Commission for Agricultural Costs & Prices Ashok Gulati; recruitment consultancy Teamlease chairman Manish Sabharwal; Sun Pharma MD Dilip S Shanghvi; and RSS ideologue S Gurumurthy.
Last week, Economic Affairs Secretary Subhash Chandra Garg had said the government was not in any dire need of funds and that there was no proposal to ask the RBI to transfer Rs 3.6 lakh crore.He further said the only proposal “under discussion is to fix appropriate economic capital framework of RBI”.
(With PTI inputs)
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Last Updated 13, Nov 2018, 7:10 PM