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Government of India VS RBI

08 Nov
Government of India VS RBI

The RBI and the Government of India are like inseparable Siamese twins who have to work together in the interest of the country. Like wedded partners, they have enjoyed great moments of comradery as well as intense frictions in their relationship. Over the years, both have learnt to resolve or manage the differences amongst themselves without impacting the day to day operations or the public getting wind of it.

Having said that, let’s look at the controversy itself. It has been reported that the differences arose, among other issues, over the government’s proposal to transfer approximately Rs.3.6 lakh crores of reserves to itself. This is not unseemly given that the RBI is an agent and banker to the government. Differences over the use of the reserves are legitimate and must be discussed in closed rooms and not via the media. But in all such matters, if one is guided by past experience, the government view prevails.

For all practical purposes, the RBI has been and continues to be an extension of the Ministry of Finance, government of India. All past and current Governors and members of the Board are keenly aware that in any differences or tussles with Delhi, the Ministry of Finance has the last laugh. If, despite this understanding, Viral Acharya chose to discuss differences in public, it only points to issues extraneous to the functioning of the Bank.

The reason for RBI playing second fiddle to the governments stems from the RBI Act itself. The government appoints the Governor and has the power to sack him. It also has enormous powers to instruct the RBI directly or through its board to carry out its dikats.  In fact, there have been numerous instances of this.  One interesting anecdote that has done the rounds is that during bank nationalization in 1969, some in the RBI were said to have had their reservations. Apparently, Mrs. Gandhi’s office called the concerned senior officers directly and ordered them to prepare the necessary paperwork for the legislation. It was done quietly without any further ado.

 
 

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