The biggest worry that has eclipsed all other points is the central governments push to use RBI’s reserve of 3.6 lakh crores for ‘development.’
New Delhi/Mumbai: Markets around the country seem to be holding their breath today as the Reserve Bank of India undergoes a crucial meeting with the ruling party. Many raised a lot of red flags over the perceived government interference in the central bank’s affairs and the anxiety it caused to the market and investors.
Congress president Rahul Gandhi tweeted: “Mr Modi and his coterie of cronies, continue to destroy every institution they can get their hands on. Today, through his puppets at the #RBIBoardMeet he will attempt to destroy the RBI. I hope Mr Patel and his team have a spine and show him his place.”
The last board meeting on October 23 ran for eight hours, taking up only two out of 12 agenda items, one RBI board member said. The rest will be discussed today, the member told Reuters.
“The first sign of trouble came in October when reports alluded to the government’s interest in Section 7 of the Reserve Bank of India Act or RBI Act, which empowers the centre to issue directions to the “lender of last resort” — meaning the government could take charge of policy. Last year, former RBI Governor D Subbarao said Section 7 has never been used in more than 80 years of the central bank’s history,” reported NDTV.
The biggest worry that has eclipsed all other points is the central governments push to use RBI’s reserve of 3.6 lakh crores for ‘development.’
‘The main point of friction between the RBI, led by Governor Urjit Patel, and the government is clearly the issue of how much reserves should the central bank keep locked in its safe. The people sent to the RBI board by the government want the centre to have access to surplus reserves the RBI has built up — money that could be used for the administration’s populist programmes including boosts to rural wages, fuel subsidies and buying crops at a guaranteed minimum price,’ the report said.
Of 18 current members in the RBI board, five come from the government bureaucracy, two are finance ministry officials, and two have close links to Prime Minister Narendra Modi and the BJP. Four have a business background, and the other five are Urjit Patel and his four deputy governors.
In August, S Gurumurthy and Satish Marathe, a former banker who was in the student wing of the BJP, were named to the RBI board. And last month, the government appointed retired bureaucrat Revathy Iyer and Sachin Chaturvedi, head of a Delhi-based think tank, while removing Nachiket Mor, who was close to RBI officials.
It is being widely believed that Rashtriya Swayamsevak Sangh (RSS) has got a lot to do with the recent appointments to the RBI as most of them belong to the Peshwa Brahmin or Chitpavan Brahmin caste. Many on twitter said that this caste has never been elected to any position but appointed.
S Gurumurthy, an RSS member, is said to have to met Modi and Union finance minister Arun Jaitley and conveyed that the RSS felt that “Rajan spoke out of turn and deserved to go”. He was instrumental in making Rajan exit and was appointed as an RBI board member.
When the Governor refused, the government took the “unprecedented step of invoking Section 7 of the RBI Act,” said Mr Chidambaram. Section 7 gives the government the power to consult and give instructions to the central bank chief in public interest. Today’s meeting might be aimed at forcing the Governor’s hand through the board, he said in a report.
Attacking the government for seeking a greater involvement in the RBI’s decision-making process, Chidambaram, a day before the meeting, said that the Centre is determined to ‘capture’ the central bank in order to gain control over its reserves.
“Government is determined to ‘capture’ RBI in order to gain control over the reserves. The other so-called disagreements are only a smokescreen,” he tweeted.
“Nowhere in the world is the central bank a Board-managed Company. To suggest that private business persons will direct the Governor is a preposterous idea,” he added.
Speaking to Sabrang India, Ashutosh Datar, an Independent Economist and former Economist at Institutional Equities research team of IIFL from 2007, said that looking at the issue without nuance will not serve a populist agenda. “Reserves are a technical issue. The law that governs the RBI, which is the RBI Act, 1934, is a colonial era law. It doesn’t serve its purpose today or solve the issues we currently face. It was constituted for a different purpose and a different time. There are no clear boundaries drawn as to where the RBI authority begins and where does central govts authority on RBI ends. Things are not clearly spelt out which leads to confusion. Implementing political mandates is also RBI’s job. Since there is no global standard in this matter, each country has their own way of dealing with central reserves. When it comes to the list of defaulters, it would unfair to the people who are on the list if they are publicly named and shamed. The mob justice will not help anyone and will only create more mistrust and anxiety in the market. We need to look at each issue separately and be wary of binaries. There are nuances to every decision. Before agreeing or disagreeing with the government outright, it’s important to be objective,” he said.