RBI governor may consider resigning after rift with govt

Devin Lawrence
October 31, 2018

"We have a fairly fragile financial system, between the public sector banks and non-banking financial companies", said Dhananjay Sinha, head of institutional research at Emkay Global Financial Services. The deputy governor even helpfully used a cricketing analogy to simplify the reasons that central banks and governments will always have different outlooks. Sentiments are already weak in the market.

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.

Facing criticism for invoking a hitherto unused section to issue instructions to the RBI, the government on Wednesday said that it respected the autonomy of the central bank but within the framework of the RBI Act. This act empowers the government to issue any direction to the Central bank governor on matters of public interest. In his speech, he warned that undermining the central bank's independence could be "potentially catastrophic".

"Both government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy".

Top sources said three consultations were sent to the RBI in August, September and in the first week of October by the finance ministry.

Relaxation of lending norms: Non-official directors of the central banking institution have been demanding a slackening "MSME forbearance" (micro, small and medium enterprises).

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NBFCs and Housing Finance Companies (HFCs) are suffering from asset-liability mismatches (ALM), CII noted adding that in a worst-case scenario, this could lead to a run on mutual funds and defaults in the NBFC sector. For the objective, extensive consultations on several issues take place between the government and the RBI from time to time.

In light of the very public row between the Modi govt and RBI over the latter's NPA rules, there's been talk that the govt could invoke Section 7 of RBI Act. "There have been talks with the RBI on these issues, but invoking Section 7 (1) is something that has not come up yet but we need to also ensure that industries are not killed", he added.

"The government of India has never made public the subject matter of those consultations".

CNBC-TV18 has reached out to the RBI and the Prime Minister's Office, and their comments are awaited.

From the tone of Acharya's speech, it appeared that the RBI is under tremendous pressure to hand over its surpluses squirrelled away over years and hence its decision to take the issue to the people. "But it is quite worrisome to see the government trying to continuously interfere into the RBI's operations".

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