INSUBCONTINENT EXCLUSIVE:
All of this could slow a $2.6 trillion economy only months before the general election.MUMBAI/NEW DELHI: An incendiary speech by a top
Reserve Bank of India (RBI) official last Friday blew the lid off an increasingly toxic dispute between the central bank and the government
of Prime Minister Narendra Modi over monetary policy and who controls the institution's reserves
While historically there have been differences between the RBI and the governments, the extent of the rift and its public nature are
By Wednesday morning, there were media reports saying that RBI Governor Urjit Patel was about to resign
The RBI declined comment.This followed three letters to the RBI from the finance ministry threatening to invoke Section 7 of the RBI Act
that would allow the government to dictate policy to the central bank, according to a senior source with direct knowledge of
developments.But faced with declines in the rupee and government bond prices as investors got unnerved, the government issued a statement
supporting the RBI's autonomy while indicating it would still be pressing very hard to have its own way.In Friday's speech, RBI Deputy
Governor Viral Acharya said that undermining central bank independence could be "potentially catastrophic", and he even cited meddling by
the Argentine government in the affairs of its central bank in 2010 - prompting big drops in that nation's financial markets - as a sign of
how bad things can get.The remarks were widely seen as a sign that the RBI was pushing back hard against government pressure to relax its
policies and reduce its powers ahead of a general election due by May.Finance ministry and RBI spokespersons declined comment.The RBI is not
statutorily independent, as the governor is appointed by the government, but it has enjoyed broad autonomy in regulating the banking sector
It is mandated to control inflation within a 2 to 6 per cent range while keeping in mind the economic growth objective.HERE ARE SIX CRITICAL
AREAS OF CONFLICT:CASH GRABThe government has made repeated calls for the RBI to hand over more money from its reserves to help fund its
The RBI currently hands over its profits earned from various activities in the form of a dividend
But the government also wants to tap a share of the RBI's Rs 3.6 lakh crore ($48.73 billion) of capital reserves
The RBI has consistently pushed back against the demand.OUT OF THE SHADOWSThe government wants the RBI to provide more liquidity to the
shadow banking sector, which has been hurt by the defaults of major financing company, Infrastructure Leasing Financial Services (ILFS)
Those defaults triggered a sell-off in bonds and stocks of non-banking financial companies
The government has been asking the RBI for a dedicated liquidity window for these lenders similar to the one allowed during the 2008-2009
global financial crisis.JUST RELAXThe government has also been urging the RBI to relax its lending restrictions on 11 state-run banks
The curbs were imposed because the banks had a low capital base and major bad debt problems
The 11 public sector banks are barred from lending unless they reduce their bad debt levels, improve their capital ratios and become
The government says the restrictions have gone too far and have reduced the availability of loans for small- and medium sized businesses.(:
In RBI Vs Government, What Section 7 Is And Why It's Taken Centrestage)ENCROACHINGThe RBI is also irked by the government's efforts to trim
the central bank's regulatory powers by proposing to set up an independent payments regulator
Currently the RBI regulates all payments and settlements in the economy
The government says it wants a separate payment regulator which will be able to adapt to rapid changes in technology.BOARD INFLUENCEThe
government appointed S Gurumurthy, a prominent BJP supporter and an affiliate of the Rashtriya Swayamsevak Sangh (RSS), to the RBI board
earlier this year along with Satish Marathe, a former banker with ties to the RSS
Such political appointments have been unusual in the past as the RBI board's external members have mostly been economists and industrialists
Traditionally, the RBI's board has approved decisions related to internal functions of the central bank and it has not interfered in its
supervisory and monetary policy functions.KEEPING MUMSenior government officials, as well as BJP and RSS officials, are angry that the RBI
decided to go public over the quarrels
Acharya made it clear he had been asked to address the independence question by Patel and in a show of unity the three other deputy
governors attended his speech
In its statement concerning autonomy on Wednesday, the government stressed that it will keep discussions confidential.(: "RBI Looked Other
Way", Says Arun Jaitley On Loan Excesses - 10 Points)WHY IT MATTERSFOR PM MODIThe Modi government has been under pressure ahead of regional
polls due at the end of 2018 because of weak farm prices and surging fuel costs, which have been hurting rural incomes
The government recently cut excise duty on gasoline and diesel, adding to pressure on its deficit.The budget is also being undermined by
muted revenue collection from a recently introduced goods and service tax.Added to this, ILFS woes have led to a liquidity crunch across
much of the shadow banking sector and throttled off some lending.All of this could slow a $2.6 trillion economy, the world's sixth largest,
only months before the general election
To prevent that from happening, PM Modi is expected to spend more on populist programmes, including boosts to rural wages, fuel subsidies
and buying crops at a guaranteed minimum price.(: Opinion - The Growing Brawl Between RBI's Urjit Patel And Team Modi)FOR INVESTORSThe rift
has created political and economic uncertainty
Investors want policy continuity from both the RBI and the government to ensure inflation is kept in check and economic stability is
maintained.A persistent fall in the inflation rate since 2014 in a country that was used to volatile price pressures instilled confidence in
the central bank and attracted investors
However, investors fear such hard-earned economic gains could be at risk if the government can pull the RBI's strings.
