NEW DELHI/MUMBAINov 18, 2018
As Prime Minister Narendra Modi’s government turns up the heat on the Reserve Bank of India (RBI) governor to do its bidding ahead of next year’s general election it is getting the central bank’s board to take on a much more powerful role, according to government officials and board members.
Read : Govt-RBI rift
Now stacked with government nominees who can be counted on to support the administration, the board is being transformed from having a passive advisory role into a body that can exert pressure for policy change. Some economists fear it could threaten the bank’s independence. Two board members told Reuters that government pressure for easier lending policies is likely to become abundantly clear at Monday’s board meeting – the first to be held since the extent of a deep rift between the RBI and the government became public knowledge. With the election due by May, and voters concerned about weak farm incomes and whether enough jobs are being created, Modi’s ruling Bharatiya Janata Party (BJP) is keen to stimulate the economy and sees the RBI’s hawkish stance as a barrier, said government officials and BJP allies.
The government has been pressing the Mumbai-based 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.
They also want the government to have access to surplus reserves the RBI has built up – money that could be used for the administration’s populist programmes including boosts to rural wages, fuel subsidies and buying crops at a guaranteed minimum price. The RBI has hit back by questioning whether the government wanted to destroy its autonomy and warning that when this happened in Argentina in 2010, financial markets took fright.