Reserve Bank of India: What is the conflict with the government?

Pedro_P

▼ Last week, a senior official of India's central bank fired what appeared to be an explosive broadside at attempts being made to undermine the regulator's independence.
"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," Viral Acharya, deputy governor of Reserve Bank of India (RBI), told a meeting.
Days after this uncharacteristic outburst, there were reports that the government was planning to exercise never-before used powers that would allow it to give "directions" required in the "public interest" to the bank. Rumours swirled on Wednesday that Urjit Patel, the 54-year-old bank chief and a Yale educated economist, would resign. Mr Patel has now called a meeting of the bank board for 19 November.
A conflict between Narendra Modi's BJP-led government and India's central bank had been brewing for some time.
The government reportedly wants the RBI to allow ailing state-owned banks, groaning under dud loans to industries, to resume lending to small businesses. It also wants the regulator to lower interest rates to inject much-needed liquidity into the economy.
The two have also differed over government plans to set up a separate regulator to look after digital payments. In the past few months, the government has appointed a controversial right-wing accountant to the central bank board and cut short the tenure of another board member, apparently on the grounds of conflict of interest. Finance Minister Arun Jaitley stirred the pot recently when he accused the central bank of "looking the other way" while banks were lending indiscriminately some years ago.
But the main source of conflict appears to be over the government's attempts at "raiding" the RBI reserves.
A strong hint of this came at the very beginning of Mr Acharya's unusual speech where he spoke about the resignation of Argentina's central bank boss in 2010 after the president signed a decree firing him for refusing to use currency reserves to pay foreign debt.
Martin Redrado had angered the president after he rejected her order to transfer $6.6bn to a government fund to pay foreign debts and fix a hole in the budget. "I am defending two main concepts: the independence of the central bank in our decision-making process and that the reserves should be used for monetary and financial stability," Mr Redrado had said.
But why is Mr Modi's government reportedly trying to "raid" the central bank's substantial rupee currency reserves?
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kaustubhkirti

This is definitely a big issue in India today. Sanctity of the Central Bank is important to keep stability and attract foreign investment which India needs dearly

soothsayer

Big Issue yes. But not the first kind of episode. Governments always believe that since they get to select the central bank chief, there should be a sense of " loyalty'. But once these chiefs sit on the hot seat they realise how tough the job is and loyalty will fire up inflation, spiraling prices and end up in behest lending.