The timing of RBI deputy governor Viral Acharya’s scathing speech was impeccable.
In the face-off between the Reserve Bank of India and the Centre, RBI governor Urjit Patel has won the first round. And, it was his deputy Viral Acharya’s explosive speech on the government not allowing the RBI to function independently that seems to have done the trick.
The timing of RBI deputy governor Viral Acharya’s speech was impeccable. It came exactly three days before his boss Urjit Patel had a meeting scheduled with the financial stability development council in North Block. Acharya, surely, had Patel’s backing when he said last Friday that “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets”.
Such public airing of concerns by the RBI, along with reports on Urjit Patel’s possible resignation, caught the government on the wrong foot. The already battered rupee fell further while stock markets tumbled too, forcing the finance ministry to issue a hurried statement underlining the importance of the RBI’s autonomy. Even as the government claimed moral victory, it was the RBI which really had its way.
Urjit Patel, who was perceived to be enjoying the confidence of Prime Minister Narendra Modi till last year, has now openly taken on the government right before the crucial 2019 Lok Sabha elections. So much so that Patel’s ‘act of defiance’ prompted Congress president Rahul Gandhi to say, “Nice that Mr Patel is finally defending the #RBI from Mr 56. Better late than never. India will never allow the BJP/RSS to capture our institutions”.
While Urjit Patel’s recent assertive move did take many by surprise, those who know him have a different take. They say that Patel, unlike his vocal predecessor Raghuram Rajan, is a man of few words. Therefore, his silence on the demonetisation exercise, as well as his reluctance to give out relevant data on how much defunct cash came back into the system, were misconstrued.
Patel’s appointment as RBI governor, in fact, ensured continuity of the Raghuram Rajan era. Patel was Rajan’s close aide and a trusted deputy at a time when the latter found himself caught in repeated face-offs with the government for not reducing interest rates. Patel, in the financial corridors, is known as nobody’s man.
Last year, Patel along with other members of the Monetary Policy Committee firmly refused to meet finance ministry officials ahead of the review meeting in June. Besides, Patel was open in revealing that he did not support farm loan waivers. This was just the beginning. When finance minister Arun Jaitley put the blame on the RBI — after the Rs 11,400 crore fraud at Punjab National Bank shocked the nation — for not being able to detect the problem in time, Urjit Patel retaliated by pointing out how the central bank had limited powers to control public sector banks. Recently, the RBI also objected to the government’s proposal for setting up a separate regulator to monitor the payment system.
A deliberate move
With growing friction between the RBI and the government, Viral Acharya delivered the much talked about speech in Mumbai. Many analysts tracking the financial markets openly criticised Acharya for his speech. What they seem to have missed is that the speech was perhaps a deliberate move by the RBI and its governor to initiate a public debate on the thorny issue of autonomy.
The 44-year-old RBI deputy governor is a seasoned economist and would have gauged the ramifications of his public speech.
Insiders say that it was utter frustration that forced the RBI to point out the government’s gradual encroachment of its turf at a public forum. How else could they kickstart a public debate on this critical issue? After all, while the RBI implemented stringent norms to bring banks, including the weak ones, back on track, the Centre has been seemingly trying to relax those guidelines by initiating talks on invoking Section 7(1) of the RBI Act, which allows the government to directly guide the central bank. The section, which has never been invoked, essentially robs the RBI of its autonomy.
The government has also been seeking a larger chunk of dividend from the RBI to meet its own fiscal deficit target. But the central bank is in no mood to oblige.
Since Viral Acharya’s speech, there has been an attempt to paper over the cracks, particularly by the Centre. Its differences with the Urjit Patel-led RBI, however, are too grave to push under the carpet.
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