FSDC meeting: RBI’s assurance, FM’s instruction but no sign of reconciliation between the two

Finance Minister Arun Jaitley and Reserve Bank Governor Urjit Patel met on Tuesday, and talked too. But aggression was apparent on both the sides. Urjit Patel said that there was no liquidity crisis in the non-banking financial companies (NBFCs), and the Finance Minister asked the RBI to keep a watch, lest the situation got worse.

Why, after all, was there so much interest in this meeting between the finance minister and the RBI Governor? In fact, the news of the growing tension between the Reserve Bank and the Central Government has been hogging headlines for a few days now. And, under the shadow of this news, for the first time on Tuesday, Finance Minister Arun Jaitley and Reserve Bank Governor Urjit Patel came face to face.

RBI Governor Urjit Patel took part in the the Financial Stability and Development Council (FSDC) meeting chaired by Finance Minister Arun Jaitley. Along with him, RBI’s Deputy Governor Viral Acharya, Securities and Exchange Board of India (SEBI) Chairman Ajay Tyagi and secretaries of the finance ministry also attended the meeting.

Sources say that everything broadly seemed fine in the meeting, but a strain of tension could be felt. This tension had grown deeper on last Friday, October 26, when RBI’s deputy governor Governor Viral Acharya, who was appointed on the recommendation of Urjit Patel, said in a lecture that the government should not interfere in the autonomy of the Reserve Bank. By targeting the government in this lecture, Acharya had made the tussle between the RBI and the central government public, and a statement by the finance minister immediately before FSDC meeting clearly indicated a breakdown of peace than a ceasefire between the government and RBI.

Jaitely said in a statement that when the country's banks were distributing large-scale debt indiscriminately , the Reserve Bank looked the other way and this caused the bank to drown in huge debt. Although the finance minister described this whole phenomenon as a part of the RBI's functioning during 2008 to 2014, experts believe that the finance minister’s comment on the functioning and modalities of the RBI before the meeting of the FSDC was possibly aimed at giving a message to the Reserve Bank

Sources reveal that many issues were discussed during the ceremonial beginning of the FSDC meeting, in which the Reserve Bank told the government that there is no liquidity crises and there is no sign of pressure on non-banking financial companies. It is important to note here that the recent Infrastructure Leasing & Finance Services (IL& FS) crisis was looming large on the meeting when many companies related to IL& FS had expressed their inability to repay their debts. After that, the stock market was completely shaken up, as a result, and the third largest economy of Asia was threatened with a crisis.

Sources say that on the assurance of the Reserve Bank, the government instructed the Reserve Bank to ensure that the situation does not go out of hand.

But the situation is not so simple. Actually, the Reserve Bank is very upset with the government's growing interference in its functioning. The employees of the Reserve Bank have also come out openly in support of their top management on the matter.

The Reserve Bank Employees Association on Monday said that the government should stop trying to reduce the autonomy of the Reserve Bank. The All India Reserve Bank Employees Association said in a statement, "We believe that undermining the central bank is a recipe for disaster," as they asked the government to stop nibbling at RBI’s autonomy.

All India Reserve Bank Employees Association (AIRBEA) said in the statement, “Even the RBI board is being sought to be stuffed in a particular direction which would prompt the discerning people to look askance, and make it difficult for RBI to frame policies.”

The Reserve Bank employees coming in support of the top management has aggravated the government’s troubles. Already, from the beginning of this year, there is tension between the government and RBI on at least half a dozen issues. S Gurumurthy’s appointment as non-executive director in RBI board had further escalated this tension. Immediately after the appointment, S Gurumurthy started interfering in the functioning of the central bank which worsened the situation.

It was the result of this simmering tension and resentment that the RBI Deputy Governor had to openly say a government's horizon of decision-making was rendered short, like the duration of a T20 match, by several considerations.

“There are always upcoming elections of some sort - national, state, mid-term, "as elections approach, delivering on proclaimed manifestos of the past acquires urgency; where manifestos cannot be delivered upon, populist alternatives need to be arranged with immediacy."
On the contrary, the Reserve Bank adopts an attitude of Test matches and tries to win in every session. Its players remain so that they can win the next season too. "
Meeting concluded, talks were also held but whether the relations between RBI and the government will improve, there are no indications of it.