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RBI vs Government Tussle: Flashpoints in the Central Bank's Struggle For Power and Autonomy

Professor of Financial Economics and Part-time Value Investor, Transfin.
Nov 5, 2018 11:14 AM 2 min read

The tussle between the Reserve Bank of India (RBI) and the Government has in recent weeks acquired a rather public dimension. Whilst being undesirable, this is certainly not unprecedented.


The tenures of the last three RBI Governors, Y.V. Reddy, D. Subbarao, and Raghuram Rajan, have repeatedly demonstrated the natural friction between a country's Central Bank and its Executive.


The question is to what end would the current impasse last, or would it implode rather than fizzle out?


That being said, considering the extent of acrimony and lack of communication becoming obvious, even in the public domain, the risk for drastic events to transpire and lead to institutional weakening, is real.


Let us revisit the recent chain of events which brings us to where we are:


April 13th, 2017: RBI revises Prompt Corrective Action (PCA) plan, putting in place severe lending restrictions on stressed banks. Till date, 12 banks have been placed in PCA purview including 11 public sector banks and 1 private sector bank, including Corporation Bank, Allahabad Bank, Bank of India, Oriental Bank of Commerce, Bank of Maharashtra, UCO Bank, Indian Overseas Bank etc.


[Listen in from the beginning to learn more on the recent RBI vs. Government tussle]


Feb 12th, 2018: RBI pushes for accelerated resolution of bad loans. Banks directed to refer any NPA of more than INR2,000cr unresolved 180 days post recognition to NCLT under IBC.


Sept-Oct, 2018: Indian Rupees crashes, IL&FS implodes, NBFC liquidity gets locked down, markets become volatile, govt announces '5 Point Economic Action Plan'


Oct 15th, 2018: RBI sticks to its deadline pushing Payments Companies to "localise" their customer data, despite Finance Ministry and US Trade body push back.


Oct 19th, 2018: RBI releases unprecedented "dissent" note to disagree with a government panel which recommended a separate Payments regulator. The Central Bank asserted that it should continue to be the principal regulator of Payments Companies. Dissent note uploaded on RBI website.


Oct 26th, 2018: RBI Deputy Governor Viral Acharya makes a strong speech pushing for the need for Central Bank independence. Speech uploaded on RBI website.


Oct 29th-Nov 2nd, 2018: Govt reportedly "invokes" Section 7 of RBI Act to push the RBI to create a special refinance window for NBFCs, lower risk weights for MSME lending, relaxation in FPI norms, review PCA framework, relaxed capital norms.


Nov 2nd, 2018: RBI Deputy Governor N.S. Vishwanathan defends the Feb 2018 Circular which pushed for a strict timeline for recognition and resolution of bad loans. Speech uploaded on RBI website. 


Nov 4th, 2018: Govt agency issues show-cause notice against RBI Governor Urjit Patel over non-disclosure of the wilful defaulters' list.


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