Chidambaram: Govt eyeing RBI reserves, wants ₹1 lakh crore to fund election year expenses

Ans. The problem is that the government wants to control the RBI. It wants to make the RBI a Board-controlled entity. The exercise began by prematurely curtailing the term of Nachiket Mor and appointing three hand-picked directors who are no different than the government’s official directors (two Secretaries).

The government thought it could ram through its views at the Board meetings and force the RBI to implement the Board’s decisions. In this elaborate scheme, the government overlooked that the Governor’s position is unique and he is not simply a CEO obeying the Board. Packing the Board was a crude attempt to capture the RBI. From that point of time, the RBI establishment decided to push back the government.

Ans. The government wants the RBI to relax the rigour of Prompt Corrective Action; relax the capital adequacy norms for banks; and open a special window to fund NBFCs and MSMEs. Above all, the government is eyeing the reserves of the RBI and wants at least ₹1 lakh crore to fund its election year expenditure and to meet its fiscal deficit target (which is looking increasingly difficult).

Ans. The standoff will not directly impact the common person. If the government and the RBI pull in different directions, it will create more uncertainty and fear among investors. Consequently, investment and growth will be affected.

Ans. The ‘fastest growing economy’ tag is somewhat like a mask. Sure, under the new methodology, the GDP growth rate is exaggerated. But the growth rate hides many structural deficiencies. Since the government has run out of options to accelerate investment or growth, it is depending on loose monetary policy to promote investments and growth.

Ans. The government has invoked Sec 7 consultation. This is not normal consultation. It is hinting at a directive. If the government persists and issues a direction, I am certain the Governor will resign. That will be the bad news that I feared.