Editorial Simplified: Time to Talk | GS – III

Relevance: GS Paper III (Indian Economy)


Theme of the article

The Centre-RBI face-off is not healthy. They must resolve their differences in private.


Why has this article cropped up?

There has been simmering tensions over the last few months between the Reserve Bank of India and the Centre.


The reasons for conflict

  • Disagreements between RBI and the Finance Ministry over setting benchmark interest rates have been common over the years.
  • What is different this time, though, is that the disagreements appear to be over regulation per se.
  • There are three issues on which the Centre seems to have irked the RBI.
    • It has refused to accept Governor Urjit Patel’s point that the RBI is hobbled by lack of adequate powers in regulating public sector banks.
    • The second is the tussle over the RBI’s burgeoning reserves, a piece of which the Centre is eyeing to bridge its fiscal gap. The RBI resents this.
    • The last is the attempt by the Centre to set up an independent payments regulator, which the RBI sees as encroachment of its turf.
  • For its part, the Centre has several grouses, the chief among them being over an RBI circular of February 12 which redefined NPAs and revised the framework for resolution.
  • It is also upset that the central bank is not doing enough to ease the ongoing liquidity squeeze through extraordinary measures.
  • These are issues that could be easily addressed by sitting around a table, but the fact that they haven’t done so points to a complete breakdown of communication between the RBI and the government.

Is such a conflict justified?

  • A certain amount of creative tension is systemically in-built given their different perspectives: one is short-term and political; the other is long-term and technical. Such tension is good for the economy.
  • Yet, that is no excuse to spar over turf or make statements aimed at pressuring the other side into acting in a particular manner.
  • The current row is definitely worrying given the backdrop of economic turmoil, globally and domestically.

Conclusion

The Centre and the central bank must talk behind closed doors and resolve their differences as mature entities, as they have done so many times in the past.


 

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