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Government v/s Governance : The story of RBI & The Centre

Ali Azar

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Governance is what governments do. Simply put, it is a set of rules and laws framed by the government to ensure that its objectives are fulfilled. These objectives could be anything ranging from maintaining financial stability to eradicating poverty to creating jobs to ensuring friendly relations with other countries. The government, through various organizations and bodies set up by it, delegates its many functions and ensures that they are carried out smoothly in accordance with how they were designed. However, certain sensitive functions such as maintaining financial stability via the banking system and its duties in relation to currency and inflation control require a certain degree of autonomy from the government in order for it to be free of bias. It is at focal points such as these that the line between government and good governance gets blurred.

Our country’s central bank, the Reserve Bank of India (RBI) was established on 1st April 1935. Though initially privately owned, it was nationalised in 1949 and is fully government owned since then. Its primary functions include issue and printing of currency, acting as a banker to the government and other banks, controlling the flow of credit in the system, custodian of FOREX reserves and keeping a check on inflation among many other functions. Good governance in this sphere dictates autonomy so that there is no conflict of interest between meeting the goals for the country as a whole and its financial well-being.

The recent rift between the government and its banking counterpart (RBI) has once again brought the decades-old concept of autonomy of our central bank to the forefront of this argument. The timing of these concerns being raised is perhaps not all that surprising considering that the general elections are looming around the corner and the ruling party needs all its troops to fall in line. The trouble is, while the BJP is accustomed to having every other body/ organization bend according to its will, the RBI is a different animal to deal with. The central government wants the central bank to tweak a few of its policies that will allow for more liquidity in the system and a greater contribution to its kitty, both of which will aid the ruling party in setting up a bigger corpus to fight the upcoming general election (which as we all know requires massive amounts of moolah). Specifically, the government has demanded relaxation in prompt correction action (PCA) scheme for public sector banks, need for a new capital framework for RBI, addressing liquidity squeeze faced by MSME’s and aligning capital adequacy norms for Indian banks to bring them in line with Basel III framework. The centre believes that the RBI is too conservative in its policy decisions and these changes if implemented, would free up thousands of crores of rupees that could be used elsewhere (we all know where). In addition, the government believes that the central bank has built up an unnecessarily huge amount of reserves, well beyond what is required for efficiently carrying out its activities and has suggested a direct contribution to its election kitty.

The Modi led government, in trying to strong-arm its way into making the central bank accede to its demands, has threatened to use a regulatory weapon at its disposal that hasn’t been used till date since the inception of the RBI. Enter section 7(1) of the Banking Regulation Act 1949, which says the centre can give directions to the central bank in public interest, which have to be adhered to. This relatively straightforward provision can have a devastating impact on the autonomy of the central bank and mere mention of this option being considered sent shock waves through not only the banking community but also the business and political community at large. Further, the central government has appointed S. Gurumurthy, editor of the famous Tamil weekly, Thuglak, and a well-known RSS ideologue to the post of “independent” director. The Congress party rightly criticised this move and made a hue and cry about it. These desperate actions leave a bad taste in the mouth of the ordinary citizen and what the centre is taking lightly is, in trying to make the RBI bend to its whims and fancies, the government is compromising its integrity, which is anyways being questioned recently.

The litany of issues between these two heavyweights finally reached boiling point and culminated into a marathon meeting, which lasted 9 hours ending on Monday late evening. Cooler heads were said to have prevailed and an uneasy truce was reached between the government and its band of boutique bankers. It was decided to set up expert committees to look into easing of PCA framework for some out of 11 affected public sector banks and transfer of appropriate amount of reserves to the government. A transition period was agreed to for relaxation of capital adequacy norms and a scheme for the restructuring of loans for MSME’s up to Rs 25 crores would be considered. The issue of NBFC’s facing liquidity crunch was still not addressed to the satisfaction of the government with the RBI denying the extent of seriousness with which the centre views the problem.

A concrete solution to all the problems may not have been reached, but with this meeting of minds the contentious issue of section 7(1) is finally off the table and the Urjit Patel led central banking institute held its ground and managed to wriggle out of the arm lock the Modi led government was threatening to impose. Autonomy, albeit temporarily, was restored and the sanctity of the 83-year-old banking institution is intact for now

Banking

RBI : Resignation Becomes Inevitable

Ali Azar

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What happens when an unstoppable force meets an immovable object? A collision of epic proportions that has far ranging effects. No! We’re not talking about the phrase that is referenced in Christopher Nolan’s Oscar winning 2008 epic “The Dark Knight” when the Joker, who is an unstoppable criminal force, comes up against Batman, who is an incorruptible vigilante crusader. We’re talking about the effect our financial system and economy will be forced to undergo when the dust finally settles on the fall out between the unstoppable Narendra Modi led political machinery of the Bharatiya Janata Party (BJP) collides with the immovable and incorruptible erstwhile Governor Urjit Patel led outfit, the Reserve Bank of India (RBI).

Amid an already volatile political and economic atmosphere which includes state election results, unfavourable macroeconomic conditions and weak global cues, we were thrown further off balance when the Governor of RBI, Urjit Patel put in his papers at close of business hours on Monday – with immediate effect. One could say that the writing was already on the wall, as the two heavyweights (FM Arun Jaitley and Urjit Patel) did not see eye to eye on a host of issues ranging from economic capital framework, regulatory norms such as PCA, nominees on the board of RBI, transfer of reserves and liquidity crisis among others. Even the long 9 hour meeting held on November 19th between the top brass of finance ministry and RBI officials ended with an uneasy truce without a firm agreement.

Important issues among others that may have finally provoked the RBI Governor to snap the cord

Autonomy is the most sacred pillar on which the foundation of the RBI is built and there are far too many allegations that the BJP led government is systematically eroding institutions in the country to throw cold water on. Urjit Patel who was the 24th governor of the RBI took up office on 4th September 2016 and was expected to remain incumbent until September 2019. His resignation gives him the undesirable distinction of being the first governor since 1990 to step down before his term ends. The effect of his resignation is yet to be felt in the financial system and stock markets, most sensitive of which are the sentiments of foreign investors (FII’s) who consider interfering with the central bank’s independence to be a touchy topic. Rating agencies are another important element in this equation and an unfavourable outlook by such agencies could see massive outflows of capital from the country at a time when we can ill afford it.

The timing of this resignation is also cause for suspicion. It is likely the governor had made up his mind to quit a while back, but may have been coaxed into announcing it only a day prior to the results of the all-important state elections, so as not to hamper the chances of the incumbent government when polling was on. It was no surprise that comments poured in from all quarters of the political and economic spectrum, some in support and some against the decision, with the statement of former governor Raghuram Rajan resonating the most, who warned that the entire country should be worried and that it is a matter of great concern. Traditionally, the RBI is a conservative organisation whose board is meant to act in an advisory capacity. But, with government intervention at every step of the way, its board is being moulded to become an operational one, which goes against its basic character

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Important for Indian govt to heed RBI’s message on financial stability: IMF Chief Economist

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RBI

“I think their (RBI) message that financial stability is important is correct. And it is important for the government to heed that,” Obstfeld said.

 

Washington| It is important for the Indian government to heed the RBI’s message on financial stability, IMF‘s Chief Economist Maurice Obstfeld said Sunday, amidst reports of friction between the central bank and the Finance Ministry.

Addressing a group of journalists here, he also said the International Monetary Fund does not want politicians “manipulating” central banks for political ends.

“There is debate over whether it’s better for financial stability to be the remit of the central bank or an independent regulator…the UK in 1997, split them, then put them back together again. I’m not going to take a position on that…But I think…the central bank does have to be intimately concerned with financial stability to some degree and with the payment system,” he said, responding to a specific question on the recent developments in India regarding the RBI and the government.

“We need to think about what is the best institutional framework in which fiscal policy can be set with regard to the long-term stability of the economy, not just to performance over political horizon,” Obstfeld said.

“Well, I think they (the RBI and the Indian government) have reached an agreement on how to proceed. I think their (RBI) message that financial stability is important is correct. And it is important for the government to heed that,” he added.

Responding to a series of questions on the attempt in certain countries like the US, India, Argentina and Turkey to curb the independence of central banks, Obstfeld said central banks’ role as a financial regulator is critical.

Central banks have “much greater power than you thought”. They are fundamentally involved in financial stability policy, in fiscal policy, he said.

Obstfeld said if one looks at the record, the decisions taken by central banks worldwide did stabilise the economy by avoiding much worse losses in output and employment.

However, at the same time, he said, their moves also raised questions of transparency and accountability.

“So, it’s not a shock that people raise these questions and it does create a challenge for central banks to be more transparent and to communicate more effectively with a broader public about what they are about and what they are doing,” Obstfeld said.

If the central bank cannot communicate more effectively about what it is doing, then there is a possibility of political manipulation where politicians attack the central bank and undermine it, he said.

“Clearly, we don’t want politicians manipulating the central bank for political ends,” Obstfeld added.

After serving as IMF’s Chief Economist for more than three years, 66-year-old Obstfeld is set to retire this month-end and will return to the University of California, Berkley. Gita Gopinath, Indian American economist from the Harvard University, would replace him from the first week of January.

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India to retain top position in remittances with USD 80 bn: World Bank

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The World Bank estimates that officially-recorded remittances to developing countries will increase by 10.8 per cent to reach USD 528 billion in 2018.

 

Washington| India will retain its position as the world’s top recipient of remittances this year with its diaspora sending a whopping USD 80 billion back home, the World Bank said in a report Saturday.

India is followed by China (USD 67 billion), Mexico and the Philippines (USD 34 billion each) and Egypt (USD 26 billion), according to the global lender.

With this, India has retained its top spot on remittances, according to the latest edition of the World Bank’s Migration and Development Brief.

The Bank estimates that officially-recorded remittances to developing countries will increase by 10.8 per cent to reach USD 528 billion in 2018. This new record level follows a robust growth of 7.8 per cent in 2017.

Global remittances, which include flows to high-income countries, are projected to grow by 10.3 per cent to USD 689 billion, it said.

Over the last three years, India has registered a significant flow of remittances from USD 62.7 billion in 2016 to USD 65.3 billion 2017. In 2017, remittances constituted 2.7 per cent of India’s GDP, it said.

The Bank said remittances to South Asia are projected to increase by 13.5 per cent to USD 132 billion in 2018, a stronger pace than the 5.7 per cent growth seen in 2017.

The upsurge is driven by stronger economic conditions in advanced economies, particularly the US, and the increase in oil prices have a positive impact on outflows from some GCC countries such as the UAE which reported a 13 per cent growth in outflows for the first half of 2018.

Bangladesh and Pakistan both experienced strong upticks of 17.9 per cent and 6.2 per cent in 2018, respectively, the Bank said.

For 2019, it is projected that remittances growth for the region will slow to 4.3 per cent due to a moderation of growth in advanced economies, lower migration to the GCC and the benefits from the oil price spurt dissipating.

The Gulf Cooperation Council (GCC) is a regional inter-governmental political and economic bloc of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

As global growth is projected to moderate, future remittances to low- and middle-income countries are expected to grow moderately by four per cent to reach USD 549 billion in 2019. Global remittances are expected to grow 3.7 per cent to USD 715 billion in 2019.

The Brief notes that the global average cost of sending USD 200 remains high at 6.9 per cent in the third quarter of 2018. Reducing remittance flows to three per cent by 2030 is a global target under Sustainable Development Goal (SDG) 10.7.

Increasing the volume of remittances is also a global goal under the proposals for raising financing for the SDGs, it said.

“Even with technological advances, remittances fees remain too high, double the SDG target of 3 per cent. Opening up markets to competition and promoting the use of low-cost technologies will ease the burden on poorer customers,” said Mahmoud Mohieldin, Senior Vice President for the 2030 Development Agenda, United Nations Relations, and Partnerships at the Bank.

The average cost of remitting in South Asia was the lowest at 5.4 per cent, while Sub-Saharan Africa continued to have the highest at 9 per cent.

No solutions are yet in sight for practices that drive up costs, such as de-risking action of banks, which lead to the closure of bank accounts of remittance service providers.

Another persistent factor that keeps fees high is the exclusive partnership between national post office systems and any single money transfer operator, as it allows the operator to charge higher fees to poorer customers dependent on post offices, the Bank said.

“The future growth of remittances is vulnerable to lower oil prices, restrictive migration policies, and an overall moderation of economic growth.

“Remittances have a direct impact on alleviating poverty for many households, and the World Bank is well positioned to work with countries to facilitate remittance flows,” said Michal Rutkowski, Senior Director of the Social Protection and Jobs Global Practice at the World Bank.

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