The fractious dispute between the RBI and the finance ministry is morphing into a clash of personalities rather than institutions, and shifting focus to short-term economic issues as against long-term structural gains. Both pursue contrasting objectives, with one being a custodian of financial stability, and the other accountable to the public.

The government, acting from a position of strength, wants exemptions from the February 12 circular, relaxed lending norms to MSMEs, and transfer of excess reserves to fix its fiscal deficit even if it means invoking a never-before-used provision—Section 7 of the RBI Act, 1934. This, the Opposition decries, is unashamedly political both in tone and content. RBI Governor Urjit Patel, who carried the can for the NDA during demonetisation, is unrelenting, indicating, via his deputies that banks don’t have coffers a la Uncle Scrooge, that raiding the RBI’s balance sheet is harmful, and asset-stripping (polishing off surplus cash) will stoke financial trouble later. 

The government is aware that if Patel quits, there’ll be ‘wrath of the markets,’ but nevertheless may turn up the heat at the board meeting on November 19. It believes the RBI is conservative in assessing capital buffers, while the latter insists on holding adequate reserves to absorb risks and uphold credibility. It’s up to the board now to draw clear blue water on the quantum of reserves. The board—whose role is largely symbolic so far—has its most challenging task yet, which is to protect the autonomy of the institution it serves. 

Differences between regulators and governments is common globally: for instance, the ‘Audit the Fed’ plan to curtail US Fed’s independence, and ‘People’s QE’ march against the Bank of England. As economist Larry Summers puts it, although in a different context, no self-respecting central banker should yield to pressure from a politician facing a difficult re-election. But the RBI and Centre can have a healthy debate instead of a public spat. The scale of what is actually at stake demands that.