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Will RBI and the govt bury the hatchet?

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RBI and government representatives are therefore likely to make presentations on some of these issues, highlighting the impact of these changes on the banking sector,” said one of the board members on condition of anonymity. RBI’s central board currently has 18 members, including five full-time directors from the central bank. It has two government representatives, which include secretaries from the departments of economic affairs and financial services. Lending hope to the idea of a deal are the comments made last week by Rashtriya Swayamsevak Sangh ideologue and RBI central board director S. Gurumurthy. “As my understanding goes, the government is only asking for a formulation of a policy as to how much reserve the central bank must have.
Most central banks don’t have reserves of this kind at all, only RBI has these kinds of reserves,” he said on 15 November in an address at the Vivekananda International Foundation. However, another person familiar with the developments in RBI said last week that the Union government would be aggressive in its interventions and also hold RBI deputy governor Viral Acharya to task for publicly airing the internal board discussions in a speech.
THE WORST SCENARIO
In fact, it was Acharya’s speech that marked the turning point in a simmering dispute between RBI and the Union government, which has been particularly incensed over the last few months about what it believes are lapses in regulatory oversight of the financial sector: first, in not capturing the Punjab National Bank scandal and second, missing the crisis building up at Infrastructure Leasing and Financial Services Ltd, which in turn is threatening to cascade into a wider crisis at non-banking financial companies.
 
Soon after Acharya’s speech, the government went on an offensive by initiating consultations with RBI under Section 7 (1). According to Section 7 (1) of the RBI Act, “the central government may from time to time give such directions to the bank as it may, after consultation with the governor of the bank, considered necessary in the public interest”. If neither side is willing to revisit its stance, it is likely that the board would be forced to adopt a vote. According to Section 8(3) of RBI Act, 1934, the four deputy governors and the two government representatives do not have voting rights. That leaves the governor with the casting vote and 11 other members to decide the fate of the resolution. In the final analysis, it is clear that a lot will depend on the guidance provided by Patel.

The Mint, 19th November 2018

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