When Reserve Bank Governor Urjit Patel resigned on December 10, the one-time all remained surprised. Suddenly this resignation created a stir in market and government. But on the next day, the Indian government appointed former Secretary of Economic Affairs Shaktikant Das as the new governor of RBI for three years, while in such circumstances, the deputy governor of the Reserve Bank is given some time to the responsibility.
It is worth mentioning that for some time now there has been confrontation with the central bank’s autonomy issue between the Reserve Bank and the central government. Das told the new governor, Shikkantant, to cooperate with the government, describing autonomy as necessary.
Why raise the issue of autonomy of the Reserve Bank?
After assuming the charge of the newly appointed governor of the Reserve Bank, when it said that the autonomy and dignity of the central bank would be maintained, it was clear that the pulses are not black, even then there is some black in it. After this, Finance Minister Arun Jaitley also admitted that there are differences with the Reserve Bank on some issues.
On the issue of tension between the Reserve Bank and the Government, the deputy governor, Viral Acharya, has said that weakening the independence of the central bank can be ‘extremely destructive’. The people sitting in the government are also demanding from the Reserve Bank to simplify the rules for taking loans for weaker banks. At the same time, there is a talk of reducing the regulatory rights of the Reserve Bank and forming a new payment regulatory agency. There is a tug of war between the Reserve Bank and the Government about all these things.
Issue of Section 7 also came in front
In addition, the former Governor also disagreed with the Government about Section 7 of the RBI Act. There are three major sub-clauses of Section 7 of RBI Act:
- Section 7 (1): Under this, the Central Government can consult the Governor of the Reserve Bank and give directions to the bank, which is necessary in public interest.
- Section 7 (2): Under this, after any such direction, the work of the bank will be handed over to a Central Board of Directors. This board of directors can use all the powers of the bank and can do all the work done by the Reserve Bank.
- Section 7 (3): Under this, the central board of directors will have the powers of general supervision of the general affairs and functioning of the bank and the direction of directing the Governor of the Reserve Bank and in his absence, in the absence of the deputy governor nominated by him. And he will be able to use all those powers, which the right to do with the bank.
Actually, the Reserve Bank had put 12 banks in the category of instant action. This has prevented banks from offering new loans, opening new branches and giving dividends. The issue caught more and more, when the government asked to give more dividends than the RBI and questioned the need to have an additional reserve for emergencies. The major intervention of the government on the RBI’s work was exposed when the government had asked for a review of the corporate governance of the RBI. At the same time, the government had said that his role should be increased in decisions taken by the Board of Directors.
What will be the impact of the problem?
The interference between the central government and the Reserve Bank could affect the process of taking important decisions related to the economy. Especially in a time when India’s financial market is in crisis due to failure to pay debt to companies funding for major fundamental construction. This can reduce the liquidity in the entire non-banking finance sector. In such a situation, there will be fear of volatility at the top level between the government and the Reserve Bank, which can have an impact on the economy and the market as well.
How much do you know about the Reserve Bank?
The successive development, integration, policy changes and reforms of the Reserve Bank have been a long and difficult journey, which has given it a distinct identity as an institution. First of all, a bill was introduced in January 1927 for the establishment of the Reserve Bank and seven years later it was formed in March, 1934. Prior to the establishment of the Reserve Bank in 1935, the main activities of the Central Bank were primarily done by the Government of India. To some extent these works were done by the Imperial Bank of India after its establishment in 1921. Regarding the issuance of the notes, the management of foreign exchange and the responsibility of the nation government was taken for the custody of the nation and foreign exchange reserves. The Imperial Bank used to be the bank of the government and apart from its primary activities as a commercial bank, it also worked as a bank of banks to a certain extent. When the Reserve Bank was established,
It was the old days, the Reserve Bank is working as an institution which today works to ensure monetary sustainability, monetary management, foreign exchange, reserve fund management, government debt management, financial regulation and monitoring. . Its main obligations include management of money management and its creditworthiness in the right of India.
The major challenges facing the new governor
The new governor of the Reserve Bank of India, is a huge agenda of Das not only in the unfinished task of former Governor Urjit Patel, but he also has the responsibility to improve the credibility of the RBI.
- The biggest challenge to the ruling dal is to save the credibility of the Reserve Bank. They have to ensure the autonomy of the central bank by eliminating the ongoing financial crisis with the government. Significantly, the role of central banks of all countries in the global economy is very important and being autonomous by their governments is an ideal condition for them.
- The Governor of the Reserve Bank is appointed for three years. One challenge before the new governor of the Reserve Bank will be to determine the monetary policy based on the domestic and global economic situation during its three-year tenure and better coordination with the Central Government.
- Former governors have opposed the change in the RBI by the central government. For some time now, the central bank has tightened its policies in the banking sector in the country and this has affected the work of taking and giving loans to public sector banks. Simultaneously, governing the policies of the NPA reform of banks is also a big challenge in front of the new governor.
- Prior to the Central Government, inflation is the biggest issue. The central bank determines its policies while making inflation an important basis. Increasing or decreasing interest rates of banks is determined by making the rate of inflation even higher in the country and at the global level. During the last four years, the country had received relief from getting crude oil in low prices, due to which the central government and RBI were able to control inflation. In such a situation, the opposite of global positioning will be an important challenge for the RBI to keep inflation under control.
- Considering the clarity and better monetary policy on the issue of autonomy from the central government, furthering the country’s economy in view of the current domestic economic situation and global challenges, the Reserve Bank is a key challenge before the governor. Apart from this, promoting large investments in the country, performing better on the criteria of business facilitation in the global economy and supporting appropriate policies to increase domestic business will be extremely challenging for the central bank.
Government’s favor on RBI autonomy
Due to the controversy over the Reserve Bank, the Central Government issued a press release on October 31, explaining:
“Under the framework of RBI Act, autonomy for the central bank is a mandatory and undisputed requirement related to governance. Various governments have kept this in mind and respected it. Both Government and Central Bank are guided by the requirements of public interest and the Indian economy in their functioning. In view of this, from time to time, the government and the RBI advise on various issues in detail. The Government of India does not make its content public and provides information about the final decisions.
Source: Hindu Business Line, PIB