Days after the rift between the Indian government and the Reserve Bank of India became public, some reports have suggested that the Governor of the federal bank, Urjit Patel, may resign. The news of Patel’s possible resignation has rocked the Indian government.
A report by news agency Reuters said that Urjit Patel may consider resigning from his post given a breakdown in relations with the government headed by Prime Minister Narendra Modi.
The rift between the RBI and the Modi government turned ugly after Patel’s deputy, Viral Acharya, said last week that attempts to undermine the central bank’s autonomy could prove be ‘potentially catastrophic.’
What inflamed the tension further was the statement by Union Finance Minister Arun Jaitley, who blamed the central bank for failing to stop a lending spree during 2008-2014 that left banks with $150 billion of bad bank loans.
This was on the day Patel and other regulators, including the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority, met Jaitley and other top finance ministry officials at a meeting of the Financial Stability and Development Council on Tuesday to discuss the liquidity crunch.
Meanwhile, it also emerged that the government had invoked Section 7 of the RBI Act at least invoked 3 times. Section 7 allows the govt to override RBI’s autonomy. According to reports, the Modi government had invoked Section 7 first time soon after Allahabad court’s verdict in RBI versus Power companies.
The letter, according to Firstpost, wanted RBI to carve out exemption for power companies under 12 February circular. Second letter, the report added, was on using RBI’s capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs.
The news of Urjit Patel possibly resigning from his post has evoked strong reactions. Former Finance Minister Yashwant Sinha tweeted, “If indeed govt has issued directives to the RBI then its governor should resign forthwith.”
Former Finance Minister P Chidambaram tweeted, “If, as reported, Government has invoked Section 7 of the RBI Act and issued unprecedented ‘directions’ to the RBI, I am afraid there will be more bad news today.”
He added, “We did not invoke Section 7 in 1991 or 1997 or 2008 or 2013. What is the need to invoke the provision now? It shows that government is hiding facts about the economy and is desperate.”
In its statement issued Wednesday, the finance ministry said, “The autonomy for the Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this. Both the Government and the Central Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy. For the purpose, extensive consultations on several issues take place between the Government and the RBI from time to time. This is equally true of all other regulators. Government of India has never made public the subject matter of those consultations. Only the final decisions taken are communicated. The Government, through these consultations, places its assessment on issues and suggests possible solutions. The Government will continue to do so.”
Earlier, a letter by the All India Reserve Bank Association had said that the deputy governor, Viral Acharya, spoken more “in disgust and despondency” due to continuous nibbling by the government and the finance ministry.
The letter said, “Even the RBI board is being sought to be stuffed in a particular direction which would prompt the discerning people to look askance, and make it difficult for RBI to frame policies.. We appeal to all right-minded people and experts to speak out and persuade the government to amend, and let RBI do its jobs in an unfettered was as per statutes, mandates, practices.”
If indeed Patel chooses to resign to protect the independence of the RBI, this will be a disastrous news for the Indian economy, which has been on the downward slide for several years now. The development also comes on the day, the RBI confirmed in an RTI reply that its former Governor Raghuram Rajan had indeed sent a list of NPAs to the PMO in February 2015.