Indian national flags fly outside the North Block of the Central Secretariat buildings, which houses the Ministries of Finance and Home Affairs, in New Delhi, India. (Photographer: Anindito Mukherjee/Bloomberg)

India Wants to Discuss RBI `Governance Issues' With Central Bank

(Bloomberg) -- India’s government wants to discuss changes to the Reserve Bank of India’s governance structure at a board meeting next month, including setting up some oversight panels, Economic Secretary Subhash Chandra Garg told ET Now.

Garg, who is a government nominee for the RBI board, told another television channel, CNBC-TV18, that the administration will ask for more interim dividends from the central bank as it seeks to plug gaps in its budget before a general election next year.

India Wants to Discuss RBI `Governance Issues' With Central Bank

photo
The proposals to discuss governance at the RBI’s Dec. 14 board meeting may further inflame tensions between the finance ministry and central bank. The two have been at loggerheads over issues including the transfer of surplus funds, easing of bad-loan rules and providing liquidity to the shadow-banking sector. Signs of a truce emerged at a meeting between the two sides last week, but Garg’s comments suggest the dispute is far from over.

“We should not shy away from discussions or have a fresh look,” Garg told ET Now. Any changes to the board’s governance structure shouldn’t be construed as an attempt to control the RBI’s powers, he said.

The RBI’s board is an advisory body that guides the regulator, leaving decision-making to Governor Urjit Patel and his colleagues. Bloomberg reported earlier this month that the government is proposing changes that will enable closer supervision of the central bank.

Swaminathan Gurumurthy, a chartered accountant nominated to the RBI board by the government, and other nominees such as Garg and Rajiv Kumar, have recently commented about perceived shortcomings in banking supervision, the flow of credit to industry and the need for easing financial conditions to counter a crisis in the shadow-banking sector. Garg told CNBC that the tight liquidity conditions were a concern and would be discussed at the next board meeting.

Worsening Tensions

Tensions between the government and the RBI worsened last month when central bank Deputy Governor Viral Acharya delivered a defense of the institution’s autonomy during a lecture. His speech appeared to have been motivated by the government’s threat to invoke Section 7 of the RBI Act, 1934, a never-used provision that allows the government to dictate policy to the RBI on matters of public interest.

At the previous RBI board meeting last week, the central bank said it would set up a committee to look into its capital framework.

Analysts say the dispute between the government of Prime Minister Narendra Modi and the central bank backs the arguments of Modi’s critics who say he has mismanaged the economy and is trampling on independent agencies.

“At the next meeting of the board, there will certainly be a determined push by the government to make the board decide on more issues," former finance minister Palaniappan Chidambaram wrote in the Indian Express on Sunday. "If Urjit Patel does not stand his ground and yields more space, another institution -- a venerable one -- would have fallen."

©2018 Bloomberg L.P.