Central Bank of a country & Central government of a country plays a very vital role in shaping the country. Main role of Central Bank i.e. Reserve Bank of India (RBI) in case of India is to frame Monetary policy of a country. On the other hand government frames Fiscal policy of a country. Monetary & Fiscal policies are major drivers of growth, but since many days there has been a continuous tussle between these two bodies.
These is not for the first time though, In 1937 “Sir Osborne Smith”, then the RBI governor resigned as there were some differences with government. Similarly in 1957 also the governor resigned. Thus if we have look at the current scenario the same is the case. Though RBI & Government collectively implemented Demonetization plan in 2016, the relationship deteriorated after that.
The first instance of conflicts was seen with respect to declaration of dividend by RBI. Only ₹50,000 crore was released against the budgeted amount of ₹60,000 crore. Though these amount has increased as compared to F.Y. 2017.
In June 2018, RBI has refused to reduce the interest rates as proposed by then Chief Economic Advisor, Mr. Arvind Subramanian.
The government was also forced to borrow from overseas after RBI refused to give special dispensation to oil firms.
With the downfall of IL & FS, the NBFCs started facing liquidity crunch. Thus in 2008, similar situation was created & thus RBI helped there. Thus the government wanted to replicate the same situation. But RBI denied & so public sector banks were forced to buy assets from NBFCs.
Not only this, few days back government proposed a separate payment regulating authority, which might even dilute the powers vested on RBI. The government was also not okay with the surplus cash reserves with RBI, as according to the government other countries do not have such kind of mechanism.
The situation even got worst with February 12, circular of RBI. It was considered very harsh by the government. PSBs are one of the major issues for conflicts; according to RBI except infusing money by government nothing has been done. On the other hand Union government is pushing RBI to align its regulatory capital norms and prompt corrective actions (PCA).
Finance Minister Mr. Arun Jaitley criticizes RBI for indiscriminate lending to bank.
RBI deputy governor Mr. Viral Acharya has said that “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire”. Every day the situation is even getting worst, & in a country like India a stable structure is very necessary. Though the meeting of Mr. Urjit Patel & Mr. Narendra Modi is expected to resolve the same.
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