Government Vs RBI Live: Government Defends Consultation With RBI On Policy Differences

Here's what the government said today.

Watch how Sanjaya Baru, Ananth Narayan and V Anantha Nageswaran reacted to the statement.

V Anantha Nageswaran, Dean of IFRM Business School said that he was disappointed with RBI Deputy Governor Viral Acharya's comments saying “financial markets will bring errant governments in line," he told BloombergQuint.

Ananth Narayan, professor at the SP Jain Institute of Management & Research, on the other hand, said that any interference in the RBI's decisions may affect foreign investment into the country. "If external investors start comparing India with the likes of Turkey instead of the U.S., the outcome won't be good," he said.

Columnist Sanjaya Baru dismissed the central bank’s warnings of a the fallout from the lack of the central bank’s independence. The final word cannot lie with the RBI, he said, calling Deputy Governor Viral Acharya’s speech “immature”.

• Central bankers always know that the buck stops with the government
• This is partly an ego-clash, and partly a case of genuine differences
• Government has to listen to the RBI's views, but RBI's word can't be the final one
• There's a problem of communication, we've gone from one extreme to the other
• There was too much communication under Rajan & Subbarao, and now there's too little
• Never understood this debate over RBI's autonomy, the buck has to stop with the government
• There has been some confusion in the thinking of the government
• Deputy governor's "immature" speech may have further provoked the government

Here’s what the professor of SP Jain Institute of Management and Research had to say about the growing differences between the centre and the RBI, and the government’s clarification around the issue

• The 'terse' statement was welcome, because the expectation was a worst-case outcome
• We should have never gotten to this point, this is a situation that we can do without
• RBI and North Block must reconsider why they've taken the country to this point
• Government may be trying find fiscal balance using RBI's reserves
• RBI has 27 percent of balance sheet as capital and reserves, if you include revaluation reserves
• The reserves aren't being held back, it's being lent to the government
• Hope and pray the the government's end game is not to use RBI's reserves
• The PCA banks could have been recapitized
• Rather than taking on long-term reforms, the government thinking of short-term steps
• The entire ecosystem that was supposed to keep the system safe does not come out looking good
• Government, RBI, rating agencies don't come out looking good
• Never waste a good crisis; economy is in good enough shape to pursue reforms

The government is using the central bank as a shield to get reforms in place, instead of using it as a bulwark to make the case for long-term priorities, said V Anantha Nageswaran, the dean of IFRM Business School (Krea University).

• Pressure on the RBI must be very high for Viral Acharya to have made the speech
• Benefit of doubt will always go to central bankers, and not to political leaders
• There's a way to guide the central bank with finesse, without creating a crisis
• The real issue with RBI's reserves
• The government wants comfort on fiscal deficit, RBI wants to maintain sufficient reserves
• Government should be using the RBI as a bulwark to make the case for long-term priorities
• In fact, the government can use RBI as a shield, to get reforms done
• There are issues to reflect on from the RBI's point of view
• Obvious that both sides should react with more maturity

The statement from the government is very bland, Columnist TCA Srinivasa Raghavan told BloombergQuint, reacting to the development. Here are the key highlights of what he said.

• The government couldn't have said anything more or anything less
• If the government wants things to be done, they can.
• It will be sad if things come down to invoking of Section 7 of the RBI Act.
• I hope the Government and the RBI can sort this out without too much fuss
• The government needs to decide on whether it needs RBI's money to bring down fiscal deficit or give people sops

The rupee has risen above the day's low of 74.14 per dollar and is now trading at 73.93, in response to the government’s clarification on its tussle with the Reserve Bank of India.

The government has issued “several” letters to the Reserve Bank of India seeking consultations under Section 7 of the RBI Act, said a person familiar with the matter.

While consultations have been sought under this provision, no directions have been given, said this person. The provision would only considered to be ‘invoked’ if directions are given.

Issues on which the government has written to the RBI include the prompt corrective action framework for weak banks, said the person. The letters were issued at least a month before Deputy Governor Viral Acharaya gave a strong speech on central bank independence, the person said.

Emails were sent to spokespersons for the RBI and the government on Wednesday morning.

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Public sparring between the central government and the central bank is not healthy for an economy like India, cautioned former Reserve Bank of India Deputy Governor Rakesh Mohan. Such tussles distract from the functioning of the Reserve Bank and impact the confidence that markets and observers have in the country’s central bank, Mohan said in an interview with BloombergQuint.

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The government is set to give a clarification on the on the reported rift between the Reserve Bank of India and the government, an official told reporters in New Delhi today, asking not to be identified citing rules.

Rajiv Kumar, secretary at the Department of Financial Services and Subhash Chandra Garg, secretary at the Department of Economic Affairs will issue the clarification. This comes days after Reserve Bank of India Deputy Governor Viral Acharya gave a strongly-worded speech on the central bank’s independence on Oct. 26.