RBI Deputy Governor Viral Acharya, who has one more year of his tenure left, has once again reinforced the issue of central bank's autonomy by citing cricket analogy, 'government plays T-20, we (RBI) play Test match'.
Few years ago, the then RBI Governor D Subbarao famously said, 'Thank God, the RBI exists.' This was in response to the then Finace Minister P Chidambaram's remarks that he would 'walk alone' to ensure economic growth in the face of tight monetary policy of RBI. Subbarao, whom Chidambaram appointed, said, "I do hope Finance Minister will one day say, I am often frustrated by the RBI, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the RBI exists."
The RBI always has had its disagreements with the government, mostly in private and rarely in public, when it comes to its autonomy in setting the monetary policy, regulating banks, managing the rupee value in foreign exchange market, and even debt management function. The history of RBI is actually strewn with such anecdotes if one talks to RBI maindrains in private.
There are quite a few public spats. In the late 50s, the fourth RBI Governor under Jawaharlal Nehru's prime ministership, Benegal Rama Rau exited abruptly when the then finance minister encroached into RBI's turf by levying some taxes. The 22nd Governor D Subbarao had a public spat with two finance ministers (mostly P Chidambaram) over the direction of interest rates. Raghuram Rajan, predecessor of incumbent Governor Urjit Patel, always showed the mirror to government, which was not appreciated by the current government.
Clearly, RBI is too big an insitution to be cowed down by government bureaucrats or the ministry. Over the decades, it boasts of visionary governors like M Narasimham, C D Deshmukh, I G Patel, Manmohan Singh, R N Malhotra, C Rangarajan, etc. In the immediate history, Governor Bimal Jalan was known for smoothly managing the monetary policy when the East Asian Currency crisis impacted many countrues in the late 90s. Governor Y V Reddy was known for building safegaurds in the economy which saved India when the global financial meltdown hit the world.
Governor Rajan's biggest contribution was on kickstarting the cleaning of banks' balance sheet from hidden or likely NPAs. This exercise continues even today as Governor Urjit Patel also refuses to budge from relaxing NPA guidelines.
Patel's start as the new Governor was a bit challenging as government announced demonetisation which RBI didn't get the time to prepare for. The RBI received all the flak for issuing numerous circulars, but Governor Patel did not get into a blame game as there was a larger interest meant to be served with demonetisation. It was not achieved, though, as the entire money came back into the system.
In fact, Governor Patel broke his silence when the government started the blame game over the Nirav Modi scam. What infuriated the RBI was the comment from Finance Minister Arun Jaitley where he said that the regulators have a very important function. "Regulators ultimately decide the rules of the game and they have to have a third eye which should be perpetually open. Unfortunately, in the Indian system, we politicians are accountable but regulators are not," the finance minister had said.
Exactly after two weeks, Governor Patel shot back saying the RBI's regulatory powers over public sector banks (PSB) are weaker than those over private lenders. In his speech, Deputy Governor Acharya also said that there are limited power over PSBs, especially overthrowing boards, mergers and license cancellation etc.
For quite a long time, the government and the RBI have been at loggerheads over the public debt management, a function which is under RBI's domain and the government wants to hive off. This issue often came up during the tenures of D Subbarao and Raghuram Rajan, but the RBI had strongly protected its turf. The government still wants a separate agency managing the public debt function, probably with bureaucrats manning it whereas RBI wants an agency independent of government and the RBI. While the public debt management issue is still hanging, the government has set its eyes on yet another RBI function -- Payments & Settlement. Last week, a government committee suggested creation of an independent regulator to manage payments-related issues. This is yet another instance of encroaching into RBI's turf or taking away its powers. The RBI, in its dissent note to committee, has outrightly rejected the idea.
Last but not the least, there were differences between the RBI and the government over the transfer of surplus dividend to the latter. Two years ago, there was some pressure from the government on RBI to pay higher surplus during 2016-17. The government in its Budget had allocated Rs 58,000 crore, but the RBI managed to transfer only Rs 30,659 crore due to fall in its income on account of demonetisation costs. The government had its eyes on the Rs 13,149 crore, which was set aside by RBI as contingency fund.
Deputy Governor Acharya also mentioned the RBI's balance sheet strength. "Having adequate reserves to bear any losses that arise from central bank operations and having rules to allocate profits is considered an important part of central bank's independence from the government," he said.