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Picture Courtesy: Indian Express

Context:

The RBI Governor Shaktikanta Das' tenure as Governor of the Reserve Bank of India (RBI) ends on December 10, after a disagreement with the government near the end of his second term.

What is the root cause of the tension between the RBI Governor and the government?

The RBI's refusal to cut key policy rates in response to the government's proposal to address the slowdown in GDP growth. The RBI prioritized inflation control over economic growth, leading to a disagreement with the government.

Previous RBI governors, including YV Reddy, D Subbarao, Raghuram Rajan, and Urjit Patel, have all disagreed with the government. Monetary policy decisions, interest rates, and the central bank's autonomy have all been major subjects in these disputes.

YV Reddy (2003-08)	YV Reddy disagreed with the then Finance Minister over financial market development and a controversial farm loan waiver of Rs 60,000 crore. He also opposed the use of growing foreign exchange reserves for government-backed lending without guarantees.
D Subbarao (2008-13)	D Subbarao declined requests from the then-Finance Minister to relax the RBI's anti-inflation approach and also opposed the formation of the Financial Stability and Development Council (FSDC), which he described as compromising the RBI's role in ensuring financial stability.
Raghuram Rajan (2013-16)	Raghuram Rajan strongly supported the RBI's autonomy, particularly against government attempts to transfer money market regulation to SEBI. He highlighted the significance of the RBI's ability to say "No" and warned about the potential consequences of demonetisation, but his advice was ignored.
Urjit Patel (2016-18)	Urjit Patel resigned in response to increasing government pressure, especially after the enforcement of Section 7 of the RBI Act, which empowered the government to direct the RBI on matters of public interest, which Patel opposed. His resignation came during rising tensions over topics such as surplus transfers and lending standards.
Shaktikanta Das (2018-24)	The main issue was a disagreement over the RBI's policy rate. The government pushed for a rate cut to promote economic growth, while the RBI kept the repo rate at 6.50% to control inflation.

Theme of conflicts between the RBI and the government

The RBI frequently prioritizes inflation control and fiscal discipline, whereas the government advocates for short-term growth-promoting policies.

Disagreements arise over rate cuts as the government focuses on growth and the RBI is concerned about inflationary risks.

Conflicts arise over the RBI's role in regulating financial markets and managing surplus reserves.

The government prioritizes immediate economic growth, whereas the RBI prioritizes long-term financial stability.

Sanjay Malhotra, the former Revenue Secretary in the Finance Ministry, has been appointed as the 26th RBI Governor for a term of three years.

Way Forward

The tension highlights the delicate balance that the RBI must strike between ensuring monetary policy autonomy and dealing with fiscal and economic pressures from the government.

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Source:

Indian Express