This confrontation is not new. The Mint Street and the North Block have been at loggerheads many times in the past. Be it interest rates, exchange rate or foreign direct investment (FDI) in private banks, the government of the day looked for quicker solutions while the RBI preferred to play it safe.
The bumpy ride has had its fallout — even in pre-independent India. The first governor of the RBI, Sir Osborne Smith, resigned because of serious differences with the then government. He resigned in 1937, citing the government’s attempts to dominate RBI. YV Reddy, who was RBI governor in 2003-08, let on in his autobiography Na Gnapakalu (My Reflections) how he had telephoned the then secretary of the Department of Economic Affairs, Rakesh Mohan, to vent his anger against the then finance minister P Chidambaram.
As recent as 2016, Raghuram Rajan announced that he wouldn’t be serving a second term as RBI governor. He later said: “I left when the government and I could not agree on terms for me to stay on.”
Traditional trouble spots
For North Block: Growth and liquidity matter the most
For RBI: Price stability is key; growth is secondary to controlling inflation.
While the Modi government wants easier credit flow so that spending can be unleashed ahead of the 2019 election, RBI is wary that it will add to the burgeoning bad debts.
Triggers for the discord include:
RBI’s February 12 circular that asked banks for the provisioning of all NPAs, including those defaulted by one day.
The government’s blaming regulators for inadequate oversight of the financial sector, leading to bank frauds.
The liquidity crisis at NBFCs after the fall of Infrastructure Leasing and Financial Services (IL&FS).
Demand by non-official directors on RBI Board for forbearance for MSME.
RBI’s unwillingness to spare part of its forex reserves as wanted by the government for re-capitalisation of PSU banks