RBI autonomy debate

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Issues between RBI and Government:

  • Government wants to ease lending norms for facilitating MSMEs. RBI want to continue banks clean-up efforts instead.
  • Government wants to setup an independent Payments Regulatory Board. RBI wants it under its own purview.
  • Government and RBI differ on classification of NPAs.

Payments Regulatory Board issue:

  • Reserve Bank of India (RBI) said there is no case for having a regulator for payment systems outside the central bank.
  • The RBI had submitted a dissent note, against certain recommendations of the inter-ministerial committee for finalization of amendments to the Payment & Settlement Systems Act, 2007.
  • The draft Payment and Settlement System Bill, 2018 had made an important observation. It said that an independent payments regulatory board (PRB) needs to be established to regulate the payments sector aimed at fostering competition, consumer protection, systemic stability and resilience in the payments sector.
  • However, according to the RBI’s dissent note, the central bank believes that the PRB must remain with the central bank and headed by the RBI governor. The RBI and the government may nominate three members each to the board, with a casting vote for the governor.
  • RBI had cited the report of the Ratan Watal Committee on digital payments as recommending the establishment of the PRB within the overall structure of the RBI, arguing therefore that there is no need for any deviation.
  • In support of its stance, the RBI stated that the activities of payments banks come well within the purview of the traditional banking system, which the central bank oversees as the overarching financial regulator.
  • Thus, according to this logic, it might make better sense to have the RBI oversee the activities of payments banks as well instead of creating a brand new regulator for the growing industry.
  • The RBI, in essence, is pointing to the interconnection between the payments industry and the banking system to back the extension of its regulatory powers.
  • In conclusion, the RBI’s case makes good sense when seen from the perspective of the cost of regulatory compliance.
  • Also, there is the real risk that a brand new regulator may be unable to match the expertise of the RBI in carrying out necessary regulatory duties.

Section 7 of RBI Act:

  • The RBI is an entity independent of the government as it takes its own decisions. However, in certain instances, it has to listen to the government.
  • This provision in the RBI Act is contained in its Section 7 which says:
    1. 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, consider necessary in the public interest.
    2. Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.
    3. Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.
  • Thus, it is clear from the above that this section empowers the government to issue directions in public interest to the central bank, which otherwise does not take orders from the government.

Why is it that Section 7 is seen as an extreme measure?

  • It is important to note that Section 7 has never been used till now.
  • It was not used even when the country was close to default in the dark days of 1991, nor in the aftermath of the 2008 global financial crisis.
  • Importantly, it is not clear how this Section operates since it has never been used.

Y V Reddy (Ex RBI Governor) take on RBI autonomy:

Editorial Analysis:

  • He explains his understanding of RBI autonomy under three functions. These functions are:
    1. operational issues,
    2. policy matters, and
    3. structural reforms.
  • In the case of the first, he believed in total freedom; on the second, he preferred prior consultation with the mandarins in North Block; and on the third, he worked in “very close coordination” with the government.

Position taken by current Government:

  • The recent statement put out by the government underlines that the RBI is autonomous but within the framework of the RBI Act.
  • It is thus clear that the central bank cannot claim absolute autonomy.
  • It is autonomous within the limits set by the government and its extent depends on the subject and the context.
  • It is important to note that in a democracy, it is unthinkable that we will have an institution that is so autonomous that it is not answerable to the people.
  • Experts point out that the risk of such an institution is that it will impose its preferences on society against the latter’s will, which is undemocratic.
  • It is autonomous and accountable to the people ultimately, through the government.

Concluding Remarks:

  • Option of Section 7 is certainly available to the more powerful side; but it is important to note that Section 7 is a deterrent never to be used.

Rupee Crisis

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Rupee Crisis:

  • The rupee slid to a 19-month low against the dollar.
  • Indian rupee for first time in history plunged to record low of Rs. 70.07 against US dollar on 14 August 2018
  • Rupee has been on downslide in 2018 and has slipped 9% in 2018.


Factors responsible

  • The rupee’s depreciation is in line with other emerging market currencies as the dollar index has strengthened in the wake of the U.S. Federal Reserve raising interest rates.
  • Elevated oil prices are also weighing on rupee as India’s dependence on oil imports is very high.
  • Other factors that are impacting Indian currency are the political uncertainty in the wake of upcoming State elections and the general elections of 2019.
  • Concerns over earnings outlook has led to FPI [foreign portfolio investor] withdrawing from Indian market.
  • Concerns about inflation and the fiscal deficit also impacted bond prices.
  • Equities too fell due to losses in energy, PSU bank, media, infrastructure, realty and metal stocks amid signs of an escalating trade war between the U.S. and other world economies.
  • Turkey’s currency crisis has triggered for fresh selling across emerging markets and further down sliding rupee sharply.


Turkey angle:

  • Turkish lira has been in free fall following political and economic problems in Turkey, combined with fresh trouble on the external front.
  • It has slid by almost 50% against dollar in past one year.
  • The primary reason for ongoing rout in lira is poor economic management by government of President Recep Tayyip Erdogan.
  • Turkish economy is overheating due to soaring inflation (has reached annual rate of nearly 16% in July 2018), mounting levels of foreign debt and very high current account deficit (CAD).
  • Moreover, both Turkish government and central bank are facing serious loss of credibility.
  • There are also signs of massive bubble in construction sector of Turkey, which is further threatening country’s already fragile banking system.


Implications of rupee’s fall

  • On Imports: 
    • Weak rupee can act as kind of import tax.
    • Due to fall in rupee, importers (especially oil companies and other import-intensive companies) will be hardest hit as cost of importing goods or capital goods in to India will increase.
    • They will have to pay more Indian rupees to buy an equivalent amount of dollars.
  • On Exports: 
    • Exporters benefits from weak rupee as they get more rupees while converting their dollar export earnings into Indian currency.
    • India’s software exporters will benefit from rupee’s decline.
  • On Overall Economy:  
    • RBI assess trend in rupee vis-à-vis emerging market currency pack and if all emerging market currencies are depreciating, it may further allow rupee to weaken to protect export competitiveness.
    • However it will make imports costlier. It will increase oil prices (India is world’s third biggest oil importer and ships in about 80% of its crude oil requirements) which may exert further exert pressure on CAD and cause inflationary pressure.
    • It may force RBI to hike interest rates to check inflationary pressures.
    • It will also play important role in attracting long term foreign direct investment (FDI) to support make in India agenda, which has not yet taken off and one of the reason being the strong rupee value.
  • Inflation: More expensive imports are likely to drive inflation upward
  • Oil Price: It impacts the oil import bill since it costs more rupees per barrel of oil, which plays its own part in pushing inflation up
  • GDP: Costlier inputs and the subsequent increase in the prices of finished goods should have a positive impact on GDP. But the consequent decrease in demand due to higher prices could nullify this.
  • Tourism: Tourism could grow as more tourists visit India since their currency now buys more here. 


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