If the feud between the government and the Reserve Bank of India (RBI) escalates further (as reported by several media organisations), there is a good chance that governor Dr Urjit Patel will throw in the towel at the next board meeting on 19th November.
Sources, who are in touch with the governor, say that he is not only tired of the fight with the government, but it has also been impacting his health in a big way.
The RBI has been at loggerheads with the government over three demands: transfer a higher portion of its reserves to the Centre to keep the fiscal deficit in control; inject more liquidity into the system to stave off a possible blowout among housing and finance companies; and relax the norms for prompt corrective action (PCA) and income recognition of banks.
The spat spilled out in the open after RBI deputy governor Viral Acharya spoke about the consequences of messing around with the central bank's independence while delivering the AD Shroff Memorial lecture in Mumbai on 26th October.
Dr Acharya had said, “Governments that do not respect central bank independence will sooner or later incur the wrath of the financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.”
Since then, the government has been openly critical about the RBI and seems prepared to use its powers under Section 7 of the RBI Act to issue directives to the central bank.
While various governments, starting from the first prime minister Jawaharlal Nehru, have been in confrontation with RBI governors at various times, it is believed that no government has issued directives to the central bank under the provisions of Section 7 in its 83-year history.
Dr Patel is an unusual governor. He is extremely introverted and unimpressed by the trappings of power that the post brings with it.
Unlike previous governors who revelled in the sprawling heritage bungalow at Altamount Road in Mumbai allotted to them, Dr Patel had not even moved into it. This is primarily because it does not suit the needs of his aged mother who lives with him.
While a Mumbai newspaper reported that the bungalow is being fitted with a ramp and other changes for the governor, those who know him say that he is not too keen.
According to a RTI (Right to Information) query based article in the Indian Express
, Dr Patel has also no support staff at home allocated by the RBI.
Interestingly, Dr Acharya, the deputy governor, who is at the centre of the RBI-government faceoff, is also immune to the trappings of power and position associated with the job.
Dr Acharya, who is on leave from the Stern School of Business, New York, lives in Juhu-Vile Parle, a suburb of Mumbai because he wants to be able to spend time with his parents during his Mumbai assignment. Sources say that he too may take a call on whether or not to continue, if Dr Patel chooses to quit.
In an election year, after the economic setback already caused by the disastrous decision to demonetise currency, the government is desperate to revitalise economic activity. But it will find it hard to give a positive spin to the resignation of two top central bankers at a time when the financial sector is in turmoil and beset by multiple scams, largely due to collusion and complicity by public sector bank chiefs, whose appointments are the government's prerogative.
Nearly 10 PSBs were headless for large chunks of the NDA’s (National Democratic Alliance) first term.
Dr Patel took over on the eve of demonetisation and has silently carried the can for the government's disastrous decisions. There wasn't a peek out of the RBI even when Dr Patel was personally criticised for various policy changes and flip-flops that were mainly at the behest of the government.
RBI insiders tell us that the notes had to be repeatedly counted under directives from the finance ministry, which was probably unwilling to accept that all the 'black money' is now sitting with banks. Moneylife's own RTI filings show that large chunks of this currency, is in JanDhan accounts.
While it is unclear what turn the RBI-government face-off will take at the next board meeting, we at Moneylife believe that there is certainly a need for the central bank to become more transparent and accountable to the public.
Its performance as a banking supervisor has been very poor, it is not subject to any audit even on operations and it has zero accountability for its regulatory and policy decisions as well.
Not only is decision making extremely slow and capricious, but the central bank has displayed the attitude that nothing it does can ever be questioned, even when those decisions have nothing to do with monetary policy.
RBI has not done anything effective about banks mis-selling third party products and refusing to pass on the benefits of lower policy rates to floating rate borrowers. Besides, RBI has openly defied the orders of Supreme Court and Central Information Commissioners to publish the details of wilful defaulters.