A day after the two sides publicly and bitterly crossed each other, the Reserve Bank of India (RBI) and the union government took a step back on Wednesday. However, going by the signals—including a short statement issued by the ministry of finance and new disclosures that have come to light—neither side appears willing to blink, suggesting that both are ready to dig in their heels for what is turning out to be a battle of attrition.

Here’s a look at the key personalities involved in the public spat:

Urjit Patel, governor of the Reserve Bank of India

RBI governor Urjit Patel’s silence is also his biggest weapon: he has not shied away from resisting the government’s pressure tactics. Photo: Abhijit Bhatlekar/Mint
RBI governor Urjit Patel’s silence is also his biggest weapon: he has not shied away from resisting the government’s pressure tactics. Photo: Abhijit Bhatlekar/Mint

Urjit Patel’s silent deportment is perhaps his biggest handicap. Patel began his term as Reserve Bank of India (RBI) governor by weathering a man-made storm. A few weeks into office, he had to contend with the after-effects of demonetisation.

His studied reserve, shunning of public events and refusal to criticize the government’s unilateral action, or its impact on the broader economy, didn’t quite endear him to the public; in fact, his reticence was misconstrued as support for the government’s action.

The truth is that the currency is the government’s exclusive domain and the central bank can only pick up the pieces after the act is over.

But then, as subsequent events have proven, his silence is also his biggest weapon: he has not shied away from resisting the government’s pressure tactics.

Trouble began when RBI issued its contentious 12 February circular, which tightened the definition of loans defaults and non-performing assets (NPAs).

This affected many companies, especially power companies, and threatens to further bloat the bulging non-performing asset (NPA) corpus. Protests from the government, Parliament members and other influential lobby groups failed to weaken his resolve. This banker with a PhD in economics from Yale University has demonstrated that he is made of sterner stuff, except he does it quietly.

Arun Jaitley, finance minister of India

The last thing finance minister Arun Jaitley wants while dealing with issues like capital outflows, a weakened rupee and high oil prices, is a mutiny under his nose. Photo: Abhijit Bhatlekar/Mint
The last thing finance minister Arun Jaitley wants while dealing with issues like capital outflows, a weakened rupee and high oil prices, is a mutiny under his nose. Photo: Abhijit Bhatlekar/Mint

Finance minister Arun Jaitley, the ‘go to’ man for the Modi administration when it needs a national consensus among bickering states for ground breaking reforms like the goods and services tax (GST), is now in the eye of a storm himself.

The unprecedented differences in opinion between the RBI and the finance ministry under his watch are out at the most inopportune moment for the government that is set to seek re-election early next year.

One of the priorities for Jaitley, 65, who recently returned to office from a kidney surgery, is to ensure liquidity for small businesses, a key constituency for the ruling BJP. A less than enthusiastic response from RBI to some of the ways suggested by his ministry—like easing the lending restrictions on 11 state-run banks—has only added to the tension.

Jaitley’s response on Wednesday to the crisis in the form of a statement is telling: while RBI’s autonomy as defined by law is accepted, its exchanges with the government had better remain private. The message ends with a sting—the government will continue to do what it does. That is, giving its assessment and suggesting solutions. The last thing Jaitley wants while dealing with issues like capital outflows, a weakened rupee and high oil prices, is a mutiny under his nose.

Viral Acharya, deputy governor of the Reserve Bank of India

That the government was upset with RBI deputy governor Viral Acharya after his 26 October speech is a no-brainer. Photo: Mint
That the government was upset with RBI deputy governor Viral Acharya after his 26 October speech is a no-brainer. Photo: Mint

Explosive" and “controversial" are just two adjectives used to describe RBI deputy governor Viral Acharya’s speech in Mumbai on 26 October that brought into the public domain the differences between the central bank and the government in New Delhi.

The 44-year-old former professor at the Stern Business School of the New York University, isn’t known to court controversy, but neither is he known for not speaking his mind.

So when he ignited a firestorm by saying, “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of international investors, and longer life spans."

That didn’t come as a complete surprise to people who follow him closely.

That the government was upset with him is a no-brainer—more so possibly since his appointment was cleared by it in 2016. Acharya, who was a C.V. Starr Professor of Economics at Stern had been with the university since 2009, prior to which, he was teaching at the London Business School (LBS).

A 1995 graduate from the Indian Institute of Technology (IIT) in Mumbai, Acharya also earned a Ph.D in finance from NYU-Stern in 2001.

Rajiv Kumar, secretary in the department of financial services

Financial services secretary Rajiv Kumar is known among his colleagues as a bureaucrat who gets the work done. Photo: Pradeep Gaur/Mint
Financial services secretary Rajiv Kumar is known among his colleagues as a bureaucrat who gets the work done. Photo: Pradeep Gaur/Mint

Rajiv Kumar, a 1984 batch IAS officer from Jharkhand, has been at the centre of the ongoing crisis.

As secretary in the department of financial services, he is responsible for the functioning of 21 state-run banks. More than half of these banks are under the Reserve Bank of India’s prompt corrective action framework that places various restrictions on their lending, thereby proving an irritant to the government push to step up credit flow to small and medium enterprises. This prompted the government to write to the central bank seeking a relaxation of these norms.

With state-run banks being prominent lenders to the power sector, Kumar also helmed many meetings looking for a solution following a diktat by the Allahabad high court to the government to work out a solution to the problems of power sector producers.

Known among his colleagues as a bureaucrat who gets the work done, his job description has ensured that he is often at odds with RBI. But he has had to walk a fine line as the government has to take along the regulator on all important policy decisions involving state-run banks, given the dual regulation. During his tenure, the government managed to push through the long pending task of privatization of IDBI Bank as well as kick-start the consolidation process of state-run banks.

Swaminathan Gurumurthy, part-time director of the Reserve Bank of India

RBI part-time director S. Gurumurthy is known for his strong criticisms of the central bank’s policies. Photo: PTI
RBI part-time director S. Gurumurthy is known for his strong criticisms of the central bank’s policies. Photo: PTI

Swaminathan Gurumurthy has never been afraid to speak his mind. While his appointment to the board of RBI as a part-time, non-official director drew criticism, with the Congress citing his association with the Rashtriya Swayamsevak Sangh, RBI’s ardent critic wrote on Twitter, “Wanted to be free to speak. But when pressure built up I am needed to do something in public interest I had to accept."

The editor of Thuglak, a weekly political magazine in Tamil language, now seems to have joined issues in the brewing debate over RBI’s independence. Reacting to media reports on the pressure on RBI to ease credit to small firms and relax lending norms, Gurumurthy, a chartered accountant by profession on 29 October tweeted, “Completely wrong. Was present in the board. All directors would testify that out of 5 issues, on 4 there was agreement. On one not. No pressure at all."

Gurumurthy is known for his strong criticisms of RBI policies, including those of former governor Raghuram Rajan. Gurumurthy criticized the removal of forbearance on restructuring and the massive clean-up of bank balance sheets that were introduced by Rajan. He has also been a supporter of the view that the central bank’s money should be used to recapitalize public sector lenders.

With the government leveraging Section 7 of the RBI Act to get the central bank to the negotiating table on a host of issues including relaxing lending restrictions for weak banks to ensure flow of funds to micro, small and medium enterprises, the debate seems to have gained traction.

Subhash Chandra Garg, secretary in the economic affairs department

Economic affairs secretary Subhash Chandra Garg has his task cut out to not only manage the economic situation of the country but also bridge the gulf widening between North Block and Mint Street. Photo: Pradeep Gaur/Mint
Economic affairs secretary Subhash Chandra Garg has his task cut out to not only manage the economic situation of the country but also bridge the gulf widening between North Block and Mint Street. Photo: Pradeep Gaur/Mint

Subhash Chandra Garg, the soft-spoken secretary of the economic affairs department in the finance ministry, may not be all that he seems. In the recently concluded Financial Stability and Development Council (FSDC) meeting, while finance minister Arun Jaitley hardly spoke, the finance ministry’s case was effectively put forward before RBI governor Urjit Patel and his battery of deputy governors by Garg.

Garg headed a panel that suggested the creation of an independent regulator, Payments Regulatory Board, to deal with payment-related issues. However, RBI rejected the idea issuing a dissent note, holding that payment systems are subset of the currency and hence need to be regulated by RBI. Garg stands by his recommendation and the issue has become one of the key flashpoints between the finance ministry and RBI.

No wonder, then, people familiar with RBI consider interference from the bureaucrats in Delhi has aggravated the differences between the government and the central bank. “RBI doesn’t need independence from the government, it is independence from the executive branch that it is seeking," a person familiar with the matter said.

Garg has his task cut out to not only manage the economic situation of the country but also bridge the gulf widening between North Block and Mint Street.

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