Government appoints allies to RBI council to heat governor

While the government of Prime Minister Narendra Modi insists that the governor of the Reserve Bank of India (RBI) is preparing before the general election next year, he is obliging the board of directors of the central bank to play a much more powerful role, according to government officials and board members. Now regrouping government candidates who can be counted on to support the administration, the board is moving from a passive advisory role to one that can lobby for policy change. Some economists worry that this threatens the independence of the bank.

Two board members told Reuters that the government's push for an easier lending policy should become perfectly clear at Monday's board meeting – the first to be held since the extent of the rift between the RBI and the government.

While the elections are due to take place in May and voters are worried about low farm incomes and the creation of jobs in sufficient numbers, Prime Minister Modi's ruling Bharatiya Janata (BJP) party is eager to stimulate the economy and sees the RBI's hawkish stance as an obstacle, said BJP government officials and allies.

The government lobbied Mumbai-based RBI and Governor Urjit Patel to subscribe to a series of demands that could help boost demand. These include easing borrowing and reducing borrowing costs for small businesses, easing restrictions on loans to 11 state-run banks facing debt and capital adequacy issues, and to provide more liquidity to the fictitious lenders.

They also want the government to have access to the excess reserves that the RBI has accumulated – money that could be used for populist programs of administration, including an increase in rural wages, subsidies for fuel and buying crops at a guaranteed minimum price.

The RBI reacted by wondering if the government wanted to destroy its autonomy and warning that when this happened in Argentina in 2010, the financial markets were frightened.

Ministry of Finance and RBI spokespeople declined to comment on the article.

PUSH

Last week, there were signs of a truce uncomfortable, with some government officials saying they did not want Patel's resignation and would allow some issues to be resolved.

But at the same time, Prime Minister Modi's supporters made it clear that they wanted a major political change, and a senior Finance Ministry official said some of the government's board members had been given the green light to do so. pressure at Monday's meeting.

S Gurumurthy, a member of PM Modi's board of directors, is the new board member. He is an accountant and columnist. He was until recently co-president of Swadeshi Jagaran Manch, the economic branch of the Hindu nationalist Rashtriya Swayamsevak Sangh, who is at the base of the BJP.

In a speech last week, Gurumurthy criticized the RBI's restrictions on bank lending, saying it harmed the economy.

"We are a bank-based economy (…) in a bank-based economy, if you restrict banks, you restrict the economy, you limit the flow of funds into the economy," did he declare.

Under the RBI law of the colonial era, the government can give instructions to the bank after consultations with the governor. This law establishes the primacy of the board of directors of the RBI to do "all acts and all things" subject to the instructions of the government. It also allows Delhi to dismiss any board member, including the governor.

In practice, the government has never invoked these sections of the law. For several decades, the governors of the RBIs have been given operational freedom, although they have always worked closely with the government, said one official who was directly aware of these consultations.

Nor does the board have any direct influence on the interest rate policy. In 2016, PM Modi decided to create a monetary policy committee to set interest rates based on the achievement of inflation targets set by the country. It consists of three RBI officials and three government-appointed members, with the RBI's governor having the casting vote.

"NATIONALIST VISION"

Supporters of Prime Minister Modi are convinced that the newly appointed members of the RBI's board of directors, endowed with a "nationalist vision", could, over time, push for a reduction in the rates of return. interest, transferring surplus funds to the government and easing restrictions on bank loans.

The RBI's board of directors will ask the governor for more responsibility, said Ashwani Mahajan, co-leader of Swadeshi Jagaran Manch.

"Now, the RBI will operate more cautiously, taking into account the specific needs of the country," he said. If Prime Minister Modi were re-elected, the RBI's board of directors could ensure a greater role for the banks "in the social and economic transformation of the country," he added.

PACKED THE BOARD

Prime Minister Modi has filled the board of directors of the RBI in recent months with people with ties to his party and economists supporting the reinforcement of the government's influence over the RBI.

In August, Gurumurthy and Satish Marathe, a former banker who was part of the BJP's student wing, were appointed to the board of directors.

And last month, the government appointed Revathy Iyer, a retired bureaucrat, and Sachin Chaturvedi, head of a Delhi-based think tank, removing Nachiket Mor, close to RBI officials.

This means that out of 18 current members, five are from the government bureaucracy, two are finance ministry officials and two have close ties to Modi and the BJP. Four have professional experience and the other five are Patel and his four deputy governors.

Previously, the RBI generally proposed new members to the board of directors where the government consulted at least the governor before appointing members. Under PM Modi, there was virtually no consultation, said a former official directly aware of the appointment process.

A sign of the marathon meeting that could be scheduled, the last board meeting of October 23 lasted eight hours and addressed only two of the 12 agenda items, said one member. The rest will be discussed Monday, said this person.