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  • The government on Wednesday said the RBI’s autonomy is “essential” and will be “nurtured”, as it sought to calm investors worried by the central bank reportedly being forced to resolve differences with the Centre which has cited powers never used before.
  • Finance Minister Arun Jaitley refused to be drawn into the row saying discussions and consultations with the RBI have never been disclosed publicly.
  • The row was sparked off last week when RBI Deputy Governor Viral Acharya in a hard-hitting speech warned that undermining central bank’s independence could be “potentially catastrophic”, possible indication of the RBI being pushed to relax its policies ahead of general elections next year.
  • Several media reports claimed the government has sent at least three letters on different issues under Section 7 of the RBI Act that gives it powers to issue any direction to the central bank governor on matters of public interest.
  • The standoff was in relation to RBI’s handling of weak public sector banks, tight liquidity in the market and ways of resolving bad loans in the power sector.

The Current Scenario and Questions which Need answers

  • GoI and RBI are likely to try and avoid Government of India vs Reserve Bank of India headlines, are consequential questions that have no answers at the moment, at least none publicly available.

Reforming RBI Board

  • It’s clear now that RBI’s brass is comfortable with an RBI board that basically doesn’t function as a board, that is, it doesn’t ask searching questions.
  • If independent directors, whoever they are and whether you agree or disagree with their arguments, counter RBI’s brass on one or more areas, how’s that unfortunate? That’s what independent directors should do.
  • How one wishes ILFS independent directors, to give just one example, had asked more questions. As RBI-watchers have noted, the central bank prefers it when a board within a board, called central committee of the board, takes all meaningful decisions.
  • This mini board is basically RBI’s brass. No matter how much you wish RBI has autonomy on some key things – and this columnist certainly does – you can’t defend this arrangement.
  • And if keeping this arrangement is how RBI reckons it will be autonomous, then we have a big problem.

The Use of Section 7 of RBI act

  • This is linked to the previous point. If RBI insists on running board meetings as a fait accompli for all directors, and if GoI feels there’s no way to get a greenlight on a non-RBI brass opinion, it may feel compelled to use it.
  • It would, of course, create tension. But when RBI’s board seems to run like the board of a traditional lala company, the nuclear option may look attractive to GoI when it has strong feelings about the issue.
  • GoI wants that an exception be made for stressed power sector assets and take them out of the bankruptcy process.
  • Sparing stressed power assets from the bankruptcy process may allow speedier resolution by addressing specific pain points like fuel supply, power sale bottlenecks and provisioning rules.
  • Getting some of these power plants going will be a big economic plus. But look at it from RBI’s point of view.
  • If an exception is made for power companies, what will happen? Everyone will want exceptions. This is India.
  • Big guys in industry, especially big guys with big, bad loans, are always looking for exceptions.
  • RBI simply doesn’t want to open a Pandora’s box. On balance, it has to be said RBI is more right.
  • The bankruptcy resolution process is in its childhood, it needs good, strict parenting now.
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