The RBI will hold a meeting of its board on Monday -- a meeting that is expected to be significant no matter the outcome.
1. A lot is claimed to be known about the purportedly ongoing impasse between India's central bank and the Indian Government. There is clarity on many of the issues that are said to be on the table for discussion, whether they be the prompt corrective action (PCA) framework that has been instituted on NPA-ridden PSU banks or on the topic of providing credit to MSMEs. There is also commentary, through speeches and tweets about the other more contentious issues, which has continued till the meeting's eve.
2. The entire 'tussle' became public after a speech by RBI deputy governor Viral Acharya titled 'On the Importance of Independent Regulatory Institutions – The Case of the Central Bank'. That speech, which had gone into great detail about means and consequences of "undermining the independence of the central bank", had also alluded to just about all the topics and challenges that are said to under scrutiny.
Acharya had concluded his speech thusly:
"As many parts of the world today await greater government respect for central bank independence, independent central bankers will remain undeterred. Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of international investors, and longer life spans."
3. The waves created by the Acharya speech drew responses from the Finance Ministry, with Arun Jaitley flagging that the RBI had been asleep on the job when loans were given out indiscriminately during the second half of the UPA, and Economic Affairs secretary Subhash Chandra Garg questioning Acharya's warning about incurring 'the wrath of the financial markets':
4. On October 31, there was frenetic speculation that RBI Governor Urjit Patel would be resigning from his post, amid reports that the government had invoked Section 7 of the RBI Act under which it may, "from time to time give such directions to the bank as it may, after consultation with the governor of the bank, consider necessary in the public interest".
The reports drew a response from the ministry that the RBI's autonomy is essential, that both RBI and government have to be guided by public interest, and that the government would continue to put forth its assessment on issues and suggest possible solutions.
Patel did not resign. On the other hand, rather than catastrophe, later that day India jumped 23 positions to 77 on the World Bank's Ease of Doing Business rating -- its highest ranking ever, five years after its lowest rank ever in the final year of the UPA.
5. On November 9, Economic Affairs secretary Subhash Chandra Garg took to Twitter once again, to issue clarification that the government wasn't seeking transfer of the RBI's vast surplus capital and that it was in line to meet its fiscal deficit target.
The clarification also coincided with the Opposition's protest on the second anniversary of Demonetisation. Former Finance Minister P Chidambaram picked out the following:
6. Since then, there have been reports of discussions between the monetary and fiscal policymakers of the country, including the involvement of the PMO, to iron out differences ahead of the board meeting, even as prominent persons, ranging from former RBI Governors to current RBI board members have expressed a diverse set of views indicating the logic and reasoning that is expected to feature at the meeting.
7. The Finance Ministry's view is likely to be well represented on the board, by Economic Affairs secretary Subhash Chandra Garg and Financial Services secretary Rajiv Kumar. RBI Governor Urjit Patel along with deputy governors N Vishwanath, Acharya, Kanungo and Jain will all be present.
8. RSS ideologue S Gurumurthy who recently put forth what is likely to be one of the government's key contentions -- that in certain cases that are relevant to current discourse the RBI's norms are even stricter than required global (Basel-III) norms -- is also on the RBI's board.
9. Former RBI Governor Raghuram Rajan has put up the most substantive arguments on a number of key points, including the RBI's reserves, the matter later raised by Gurumurthy about Indian norms vis-a-vis foreign norms, and on the duties and responsibilities of the board itself.
On the reserves, Rajan said:
"The bottom line is there is no free lunch here," Rajan said.
On the duties and responsibilities of the board:
10. The board meeting comes at a time when the economy appears to be picking up and global oil prices are also easing, and within 6 months of the elections thereby adding a political dimension. The latest CPI inflation numbers are in line with the RBI's 4%(+-2%) range. Questions have been raised, however, about the state of NBFCs, in light of the crisis at IL&FS, and the NPA-related limiters on Indian PSUs to give credit to MSMEs.