New Delhi: The Finance Ministry and the Reserve Bank on several occasions in the past have witnessed divergence of views on key issues concerning interest rate, liquidity and management of the banking sector, but truce largely prevailed in the end. However, this time the conflict seems to have reached a flash point with reports of the government initiating consultations with the RBI under Section 7 of the RBI Act, which has never been invoked in the past.
Although the Finance Ministry issued a statement to stress on the autonomy of the Reserve Bank, it remained silent on whether it invoked the powers provided under Section 7, which allows the government to issue directions to the RBI in public interest. The conflict between the Finance Ministry and the RBI headed by Urjit Patel is over several issues, including relief to the power sector reeling under financial stress, handling of weak public sectors banks, addressing liquidity problems faced by the NBFC sector, and a proposal to set up a payment regulatory authority independent of the Reserve Bank.
There has also been a running battle between the government and the central bank on interest rates under the wider argument of ‘growth-inflation’ trade-off. Patel’s outspoken predecessor Raghuram Rajan too had faced issues with the government on several occasions, including management of non-performing assets and demonetisation.
Rajan had earned a reputation of being an outspoken critic on various economic and even non-economic issues, and was under attack from some quarters, including BJP MP Subramanian Swamy, for what they termed as his preference for inflation control at the cost of growth. Rajan’s predecessor D Subbarao and then Finance Minister P Chidambaram too differed on interest rates.
Bringing their differences into the open, Subbarao, before demitting office, took a dig at Chidambaram for his old comment that he would “walk alone” to ensure economic growth in the face of tight monetary policy of the central bank.
“I do hope Finance Minister Chidambaram will one day say, ‘I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God the Reserve Bank exists’,” Subbarao had quipped.