Analysis: Should govt take a step back in RBI fiasco?

RBI Governor Urjit Patel and Finance Minister Arun Jaitley

The deepening of the rift between the Reserve Bank of India (RBI) and the central government has come at the worst possible time for the country as the economy is passing through a turbulent phase. The uneasy situation is likely to cast a shadow as the country, which is already burdened with a sharp fall in the currency, rising crude oil prices and inflationary pressures.

The public spat comes at a time when the apex bank is trying to contain these macroeconomic indicators, which seem to go off hand.

On one hand, there is a liquidity crunch in the system, arising out of the IL&FS default, while on the other hand, there is an inflationary pressure on the economy. Also, forex reserves have fallen by 4% in 2018 to $394.46 billion in the week ending October 12, 2018, its lowest in the past five years from $411 billion at the beginning of the year.

Again, the rupee has been one of the worst-performing currencies against the dollar, compared with its peers this year and has come close to breach the 75-mark against the US dollar amid global uncertainties and concerns over inflation. Another factor contributing to the fall of the rupee is the fact that interest rate differentials between India and the US have led to unprecedented foreign fund outflow from the country. In October alone, FIIs and FPIs withdrew Rs 38,906 crore from the Indian debt and equity markets.

This puts the apex bank in a tricky situation on monetary policy –slashing rates would mean added inflationary pressure and a further stress on the rupee, while an increase in rates would deteriorate the liquidity within the system. 


READ MORE

RBI head should work with govt or quit: RSS head


In its October Monetary Policy Committee (MPC) meeting, the apex bank tried to maintain the balance by holding on to the rates, while ensuring liquidity into the system by continuous open market operations (OMOs). In November alone, the central bank is planning to pump in Rs 40,000 crore into the system.

As soon as the rumour spread that the RBI governor Urjit Patel may resign, the Indian currency yet again dropped below 74-mark against the greenback, after holding on within the range of 73-74 for almost three weeks. “The depreciation in the rupee is mostly because of the negative sentiment prevailing in the market arising out of a feud between RBI and the government,” an analyst from global advisory UBS said, adding that they are hopeful of the issues settling soon.

Also, there is a realisation within ruling Bharatiya Janata Party (BJP) that the economy is in a grim phase, but in their talks, the confidantes of the party blame the RBI for the public spat. An economist, who is seen as a close confidante of BJP, confided, “Viral Acharya could have chosen some other time for these issues. It is very immature on his part. Right now the economy is not doing well.”

Also, the spat with RBI comes at a time, when, the ruling BJP seems to be taking every other institution and regulator in the country heads on.

On one hand, the country is witnessing public fissures in its premier investigating agency -- Central Bureau of Investigation (CBI), while on the other hand, the ruling party president is making veiled attacks on the Supreme Court on Sabarimala row.

According to experts, all doesn’t seem to be well within the government. “There seem to be differences in the government and it’s taking shape in public. It’s not about Prime Minister’s Office (PMO), but fissures within various ministries. And they clearly look scared,” a former senior Research and Analysis Wing (RAW) official said.

With all this going on, the establishment looks in chaos, and as head of one of the financial institutions, says “It’s high time that the government steps back to maintain sanity.”

Liked the story?

  • 1

    Happy
  • 0

    Amused
  • 0

    Sad
  • 0

    Frustrated
  • 0

    Angry

Comments:

Analysis: Should govt take a step back in RBI fiasco?

0 comments

Write the first review for this !