RBI-FinMin conflict of views is old hat in India

The differences between the Union Ministry of Finance (MoF) and the Reserve Bank of India (RBI) was nothing new as it was there – if not for all -- at least for discerning observers to perceive, be it an interest rate outlook or inflation pressures or liquidity management.

It once again came to the fore last week when the RBI Governor Duvvuri Subbarao made it clear at a public forum that it would not be possible for the apex bank to finalise guidelines for new bank licences without fulfilling the enabling conditions. “We have been preparing for launching this process (of issuing new bank licences) but all the groundwork, all the enabling conditions for launching this work have to be fulfilled,” he told reporters on the sidelines of “International Conference on ‘Leveraging Cooperative Advantage” at Pune.

Just a day before, Union Finance Minister P Chidambaram had said that he had asked the RBI to finalise the guidelines for new bank licences and start accepting applications, pending passage of the Banking Laws (Amendment) Bill. “We hope that RBI will pick up the thread and finalise the guidelines and start receiving the application.”

According to Chidambaram, the existing provisions of the law and the RBI’s own guidelines for new banking licences are enablers, without necessitating for any fresh amendment. 

“We are only formalising them by amending the Banking Regulation Act and I have assured the RBI that the Act will be amended, hopefully in the winter session of Parliament, and if not in the winter session, then in the Budget session,” Chidambaram had said in Delhi. If past experience of filibuster is any indication, Chidambaram appears to be living in a dream world. 

If that is so, then why is the RBI insisting on ‘all the enabling conditions in place’ as a prerequisite for initiating the next steps? The reason apparently is that the amendments will empower it with supervisory powers over private companies entering the banking sector.

Precisely speaking, the regulator wants the power to supersede a bank’s board and powers to authorise acquisition of shares beyond 5 percent. Even at the last policy review meet on October 30, 2012, Subbarao made it clear about these aspects. “We believed, we believe and we still believe that we need these powers to move forward.”  The comments, at variance with that of Chidambaram, indicate that they are not on the same page.  

In short, Chidambaram’s promise of amending the Act in the winter session or the budget session has failed to impressed anyone, especially the RBI, say Mint Street observers.  They also question why the Centre is in a tearing hurry for new bank licences when the net non-performing assets (NPAs) of Indian banks are already 12 per cent in the current fiscal.

FM annoyed with RBI

Chidambaram appears to be unduly annoyed with RBI for not cutting interest rates – which he sees as hindering investments – at a time when the country is facing a major problem of slow growth. So much so, he even said: “…then we will walk alone,” in a rather dejected tone. However, many economists feel that asking the RBI to cut interest rate when inflation is high (above RBI’s comfort zone) and growth is moderating, will only worsen the situation.

They argue he (Chidambaram) has already built up expectations by saying that RBI was running a tight monetary policy and laid a long-term fiscal roadmap just a day ahead of the October 30 policy review meet, but there is very little that he or his government have done actually since the RBI cut repo rate – the rate at which RBI lends money to banks – by 50 basis points or 0.5 per cent in April this year.

Analysts also view there is hardly any scope for dramatically increasing tax collections in a slowing economy or to slash spending in the months ahead, especially in view of the 2014 general elections.

The central bank’s stance is that inflation, though moderated in recent months, is still remains sticky and above tolerance level, while growth has slowed. “...these trends are occurring in a situation wherein concerns over the fiscal deficit, the current account deficit and deteriorating asset quality loom large. So, the challenge for monetary policy is to maintain its vigil on controlling inflation while being sensitive to risks to growth and other vulnerabilities,” Subbarao had said recently.

Chidambaram needs to understand the RBI’s role in the country’s economy and gracefully acknowledge it. The key area where things began to clash is when the government seemed to go public on some of its preferences but without being prepared for the consequences.

 When Subbarao took over as RBI Governor, the initial perception was that since he is from North Block, the Government (read: MoF) could manoeuvre him, especially on the (interest) rate front. However, Subbarao turned out to be a part of that disappearing breed of civil servants who not only know what they are doing but are also willing to make timely decisions – without any fear or favour – and accept responsibility for them. It’s too bad for his critics, as he knows macroeconomics well.