RBI and The Central Government Fight Over Liquidity (Cash)

The Independent Reserve Bank of India (RBI) and the Central Government are in a serious scuffle. The problems of liquidity faced by some direct financial organisations are given a solution of more cash by the Government. The cash is being requested from the vast RBI reserves. To which the RBI is very reluctant to approve. The Autonomous nature of the RBI is being meddled with. The duel thus follows,

The Happening News :

RBI and the Central Finance Ministry are at loggerheads with each other. The ” seat belt” of the economy of the country is being forced to be loose. The “driver” is not complying with the safety norms of the “car”. The analogy is quite interesting as put up by the Former RBI Governor, Raghuram Rajan.

RBI Reserve Bank of india

The institutional autonomy is getting backed up by all the RBI Officials. They differ with the governments move in being lenient towards certain financial organisations. Their main objective is to protect the institution and not to serve the likes of others against the prosperity of the nation on the whole.

RBI’s Say :

Based on the financial stability of the nation at that time, RBI sets up rules to the Government on the economical promises and progresses. And the government has every right to plead for reconsideration and suggest alternatives for the request it made. RBI on the other hand has every right to say ‘NO’ to these requests and pleads.

Having the responsibility of the financial stability of the nation on its shoulders, RBI declines all the letters sent by the Government. It warns the government of the fury of the markets. The desperate measures are encouraged but the ultimate say lies with the RBI. RBI, being at the top in its field of expertise expects its independence be respected.

Government’s Version :

Government has put up the requests of easing the Non-performing Asset (NPA) norms in the cases of Non-Banking Financial Companies (NBFC) to lend more money to them helping them grow. To do this the government requests the RBI to give the money in the form of cash to help the companies to kick-start their own lending power. The requests were made of out of Public Interests and the decline by the RBI were dealt with a serious hand by the government.

Section 7 of the RBI Act has been provoked to force RBI in listening to the government.

The Bone of Contention :

Section 7 of the RBI Act gives the Directive Powers to the Government on the issues of Public Interest. Yet, the directions are not orders. A clear mention of ‘Directions may be given by the Central Government, after consultation with the Governor of the Bank(RBI), consider necessary in the interests of the public’ in the clause 1 of the section 7 is widely debated.

The severe recession of the 1990’s or the 2008 global financial crisis and other similar issues faced did not lead to the provocation of this particular section. First time in the history of this Country’s Economy this is being done. And everyone is clueless about How this Section actually Works.

RBI stands strong on its autonomous nature and the Central Government stands strong on Directing the decisions in special occasions. Not only this incident now, but also many other issues like Classification of Non-performing Assets and setting up of a separate Payments Regulatory Body other than RBI, have led to disagreements between the two.

Reports of the Speculated Resignation of the RBI Governor Urjit Patel have surfaced and we just have to wait for more updates on this Cold War.


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