The board of the RBI led by Governor Urjit Patel is meeting today
The board of the Reserve Bank of India is meeting today amid what analysts say an atmosphere of mistrust over perceived government interference on the central bank's functioning. Though the government has maintained it has no intention of forcing the RBI's hand to do its bidding, the opposition has alleged the NDA regime intends to plough into the precious reserves of the central bank in election season. With a heightened sense of alertness, the markets and investors are also closely watching the development. Any sign that all's not well in the RBI could mean trouble for the markets, analysts say.
Here are five key points on RBI vs government:
Section 7 of RBI Act
The first sign of trouble came in October when reports alluded to the government's interest in Section 7 of the Reserve Bank of India Act or RBI Act, which empowers the centre to issue directions to the "lender of last resort" -- meaning the government could take charge of policy. Last year, former RBI Governor D Subbarao said Section 7 has never been used in more than 80 years of the central bank's history.
Central bank's reserves
The main point of friction between the RBI, led by Governor Urjit Patel, and the government is clearly the issue of how much reserves should the central bank keep locked in its safe. The people sent to the RBI board by the government want the centre to have access to surplus reserves the RBI has built up -- money that could be used for populist programmes including boosts to rural wages, fuel subsidies and buying crops at a guaranteed minimum price.
Easing loans to 'shadow lenders'
The government has been pressing the RBI and Governor Urjit Patel to accede to a range of demands that could help to boost demand. They include making it easier and cheaper for small businesses to borrow, easing lending curbs on 11 state-run banks which had debt and capital adequacy issues, and providing more liquidity to shadow lenders.
Question on ideal sum of reserves
RBI board member S Gurumurthy, appointed to the central bank by the Prime Minister Narendra Modi government, has said the centre does not want to take the RBI's reserves. How much reserves should it maintain, however, needs to be discussed, he has said, adding no central bank in the world maintains such high levels of surplus at Rs 9.6 lakh crore. The opposition has alleged his view confirms their suspicion that the government is going after the RBI's money to fund its needs in an election year.
Risk to economy
Some analysts say how much reserves a central bank should hold differs from country to country, depending on the risks and economic conditions they face, and there is no one ideal sum. The RBI maintains its reserves based on assumptions that it would be enough to cover big shocks to the economy. But if that safety net is weakened, the economy will face a big risk, the opposition says.