Govt should back RBI but latter should communicate more: Experts

With the government and the Reserve Bank of India (RBI) involved in a public spat recently, thanks to the former’s discomfort over some of the latter’s decisions, the general view of stakeholders on the issue is clear: the government should walk the talk on RBI’s autonomy; the central bank should simply talk more.

Relations between the Reserve Bank and the government are seen to have worsened since Finance Minister Arun Jaitley sought to blame the central bank for the USD 2 billion PNB fraud.

In a public address, RBI Governor Urjit Patel hit back, saying the RBI was not given enough powers to regulate public sector banks.

Since then, the two have clashed on a number of issues: the RBI’s hesitance to relax the Prompt Corrective Action (PCA) norms that restricts lending by NPA-ridden banks, and the government’s view that the central bank is not managing the liquidity situation well to counter the IL&FS crisis.

Things appear to have come to head at a meeting on October 30 where the two disagreed on the liquidity situation.

PCA and liquidity

A former senior RBI official Moneycontrol spoke to said that the government wants to force banks to lend to high-risk sectors in order to boost growth.

"The government is saying there is no liquidity. If there was no liquidity, the interest rates in the call money market would have shot up but it is running between repo and reverse repo rate. So that means liquidity exists," he said.

Others, too, have said the liquidity situation is improving.

"The sectoral data for the month of September indicate that all sectors are showing a positive growth in credit,” State Bank of India's (SBI) chief economic adviser Soumya Kanti-Ghosh wrote in a research report on October 31. “Most of the credit off-take happened in the NBFC and large corporate business segment. Credit to major sub-sectors such as ‘infrastructure’, ‘textiles’, ‘chemical and chemical products’ and ‘all engineering’ accelerated."

Further, the former RBI official said that banks were already overleveraged and had taken high exposures to risky sectors. “Why should they (especially those under PCA) be allowed to lend more. Sectors such as power, construction, and infrastructure need liquidity but they have little revenue generation or cash flow. So, the growth in this manner may be detrimental for future."

He added that if the government was keen on more lending, it could infuse more capital into struggling banks. "The government owns state-run banks, which are 70 percent of the system. So what is stopping them from taking action?”

RBI’s autonomy

The fight between the two institutions became public on October 26 when RBI deputy governor Viral Acharya in a speech said the RBI’s autonomy was important.

After the October 30 meeting, where the RBI and the Finance Ministry are said to have disagreed on the liquidity situation, media reports said the government had or would invoke Section 7 of the RBI Act, a provision that could force the central bank to act. The Finance Ministry later issued a statement saying the RBI’s autonomy was “essential”.

Technically, the government owns the Reserve Bank and appoints officials to it. But given the sensitive nature of monetary policy, once appointed, central bank officials should be given a free hand to function, the former RBI official.

The RBI's next board meeting on November 19 is likely to discuss the PCA and the liquidity topics that were on the agenda at the last board meet held on October 23. Many issues were left unaddressed in the previous meeting, according to an official aware of the development.

However, the official added that the government is trying to push its agenda through its nominees on the RBI board.

Communication by RBI

The few senior RBI officials have given speeches, they have tended to attract controversy – such as Viral Acharya’s speech defending the PCA framework, and more recently when he said the RBI’s autonomy should be defended.

But otherwise, public communication by the RBI has reduced over the years, not surprisingly coinciding with media-shy Urjit Patel taking over. Months after he took over, the RBI faced flak from the public for its lack of communication during demonetisation.

Just two months after his appointment, the RBI was left with a daunting task of managing demonetisation of 86 percent of the country's currency.

Data shows that public communication by the RBI governor and his deputies has declined as compared to the years prior to Patel’s regime.

In 2018, the RBI top management has given 14 speeches that were made public. In 2017, the number was at 22. In 2016, a total of 37 speeches were given till former RBI governor Raghuram Rajan held office (till September 3) – another nine speeches were delivered till December.

In 2015, the total number of speeches by the top management stood at 50.

"The RBI should talk more in public, even engage more with us than just throwing directions at us,” said a banker. Even in the current conflict, the banker said banks are feeling “stuck between the government and the RBI.”

It also helps the markets if the central bank communicates more for better predictability, an analyst said.

But the slowdown in communication is not always bad. The Reserve Bank has taken to putting out more rigorous research instead of giving speeches, points out SBI’s chief economic advisor Ghosh in an August 29 report.

“The shift in RBI communication is quite pleasant and interesting.”