RBI vs Govt: Talks of RBI governor resignation hints at the worst ever rift between the two

When the rift between the RBI and the central government came out in the open and the matter started going out of hand, the government came out to clarify that the autonomy of the Reserve Bank is extremely important and the governments have always respected it.

"The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. The government of India has nurtured and respected this," the Union Finance Ministry said in a statement.

But, in the midst of the government's efforts towards damage control, there are also strong suggestions that RBI Governor Urjit Patel is likely to resign.

After the constant interventions of the central government in almost all the autonomous institutions of the country, the conflict rising between the Centre and the RBI has reached a critical juncture, triggered by Modi government’s interference in the functioning of the RBI.

In such a scenario, the central government has, for the first time clarified its stand on the ongoing controversy.

Both the government and RBI, in their functioning, have to be guided by public interest and the requirement of the Indian economy, also said the statement from the finance ministry.

"For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time… The government of India has never made public the subject matter of those consultations. Only the final decisions taken are communicated," the statement said.

"The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so," added the ministry statement.

In fact, news of the confrontation between the central government and the Reserve Bank has been hogging the headlines for the last few days.

Now, it is being said that the situation is so tense that the RBI Governor Urjit Patel may end up resigning. According to the news reports, the main reason of this conflict between the Central government and RBI is that the government is considering invoking Section 7 of the RBI Act. Under this section, the central government can instruct the RBI governor directly in matters related to the general public. However, it is a fact that this section has not been used since independence. From this, the seriousness of the situation may well be assessed.

That the differences between the government and the Reserve Bank have reached an explosive situation could be clearly sensed by the statements of the Finance Minister, RBI's deputy governor Viral Acharya and Governor Urjit Patel. On Tuesday, Finance Minister Arun Jaitley sharply criticised the Reserve Bank saying that the RBI failed to curb large-scale and indiscriminate lending by the banks. Jaitley publicly blamed the Reserve Bank for problem of NPAs. Reports citing government sources also revealed that in the last few months, the central government has sent letters to the Reserve Bank regarding various issues from time to time. It is being said that these letters were sent by the government, using its rights under section 7, but it has not been formally accepted.

But, RBI's deputy governor Viral Acharya's comments proves this in a way. He said on Friday, October 26, that ignoring the Reserve Bank's independence could prove to be dangerous. RBI Governor Urjit Patel himself also termed the attack on the autonomy of the Reserve Bank as unwanted.

By issuing a statement on Wednesday, October 31, the finance ministry has apparently tried to assuage the tension with the RBI. Whether the issue will be settled with this, or the government go ahead with its unpopular decision of implementing Section 7 of RBI is yet to be seen. Sources say, if the government does so, then RBI Governor Urjit Patel will be left with no option but to resign. In such a situation, it can very well be guessed that the coming days can bring more dramatic and significant changes.

It’s important to recall here that three senior officials have resigned from their post during the first four years of this government—Arvind Subramanian, Arvind Panagariya and Raghram Rajan. Subramanian resigned from the post of chief economic adviser after four years of his tenure. He cited family commitments as the reason for resigning from the post. He was appointed for three years in 2014 and his tenure was extended for a year in 2017.

Besides, Arvind Panagariya resigned from the post of Vice-Chairman of Niti Aayog on August 31. When Prime Minister Narendra Modi had set up Niti Aayog by abolishing the Planning Commission, Panagariya was elected as the Vice President and entrusted with several key responsibilities.

Before him, Raghuram Rajan resigned from the post of RBI governor. Before coming to India, Rajan was an economics professor at the University of Chicago's Booth School of Business. He has also been the Chief Economist in the International Monetary Fund. In June 2016, Rajan had announced the end of his tenure by a letter addressed to the Reserve Bank employees.