Why in News?

As Shaktikanta Das concludes his tenure as the Governor of the Reserve Bank of India (RBI) on December 10, his leadership witnessed a familiar tension between the central bank and the government.

This friction, particularly over monetary policy decisions, echoes a longstanding history of conflicts between successive RBI Governors and governments.

What’s in Today’s Article?

• Historical Context - Tensions Between RBI Governors and Governments
• Key Issues During Shaktikanta Das’ Tenure - Policy Rate Standoff
• Recurring Themes in RBI-Government Conflicts
• The 26th RBI Governor
• Conclusion

Historical Context - Tensions Between RBI Governors and Governments:

• YV Reddy (2003-2008):
  • Conflicts with Finance Ministry: Reddy faced disagreements with then-Finance Minister P. Chidambaram, particularly over the development of financial markets and a controversial farm loan waiver of ₹60,000 crores.
  • Foreign exchange reserves debate: Reddy opposed utilising India’s growing forex reserves for government-backed lending without guarantees, ensuring fiscal prudence.
• D Subbarao (2008-2013):
  • Resistance to cheerleading: Subbarao frequently clashed with Finance Ministers Chidambaram and Pranab Mukherjee over the RBI’s anti-inflation stance, which was perceived as a barrier to growth.
  • Creation of FSDC: Subbarao opposed the formation of the Financial Stability and Development Council (FSDC), arguing it undermined the RBI’s role in maintaining financial stability.
• Raghuram Rajan (2013-2016):
  • Advocating independence:
    • He strongly defended the RBI’s autonomy, resisting government moves to shift money market regulation to SEBI.
    • He famously emphasised the importance of the RBI’s ability to say “No.”
  • Demonetisation disapproval:
    • Rajan advised caution on demonetisation, warning of the costs and preparation required.
    • His recommendations were not heeded, and his term ended shortly before the policy was implemented.
• Urjit Patel (2016-2018):
  • Surplus transfer dispute: Patel resisted the government’s attempt to tap into the RBI’s excess reserves, leading to escalating tensions.
  • Resignation: Citing personal reasons, Patel resigned amid increasing government pressure, notably after the invocation of Section 7 of the RBI Act to influence policy.
    • Section 7 of RBI Act of 1934 gives the central government the power to direct the RBI on matters of public interest.

Key Issues During Shaktikanta Das’ Tenure - Policy Rate Standoff:

• Despite government pressure to cut key policy rates to address GDP slowdown, the RBI maintained the repo rate at 6.50% to control inflation.
• This decision, opposed by Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal, highlighted the central bank’s prioritisation of inflation management over growth stimulation.

Recurring Themes in RBI-Government Conflicts:

• Autonomy of the central bank: Governments often push for accommodative monetary policies, while RBI Governors prioritise inflation control and fiscal discipline.
• Interest rate policies: Disagreements frequently arise over interest rate cuts, as governments aim to spur growth, while the RBI remains cautious about inflationary risks.
• Regulatory jurisdiction: Conflicts over the RBI’s regulatory authority, including disputes on financial market reforms and surplus reserves, underscore tensions in governance.
• Diverging priorities: While governments focus on immediate economic growth and political considerations, the RBI emphasises long-term economic stability.

The 26th RBI Governor

• The Appointments Committee of the Cabinet gave its nod for the selection of the 56-year-old Sanjay Malhotra (currently Revenue Secretary in the Finance Ministry) as the 26th RBI Governor with effect from December 11 for a period of three years.

Conclusion:

• The tension between the RBI and the government reflects the delicate balance of ensuring monetary policy autonomy while addressing fiscal and economic imperatives.
• As Shaktikanta Das’ tenure ends, this enduring dynamic underscore the critical role of the RBI in safeguarding financial stability against political pressures.