Chidu shows RBI who's boss: Is this sweet revenge?

By R Jagannathan

Is P Chidambaram’s finance ministry planning to extract its own revenge on the Reserve Bank of India (RBI) for failing to deliver an interest rate cut on 30 October?

Consider two bits of news today, one in The Economic Times, and another in BusinessLine.

The first report says that the finance ministry is going to go over the Reserve Bank’s books with a fine toothcomb since the latter has said that it cannot afford to pay interest on cash reserve ratio (CRR) to banks. If it does, the profits it transfers to the government can come down.

The BusinessLine story says that RBI Deputy Governor, Subir Gokarn, a strong votary of giving inflation-control priority over growth, may not be given an extension at the end of his three-year tenure.

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The newspaper says a search panel has been constituted to appoint another deputy governor, even though Gokarn, whose three-year term ends on 23 November, in entitled for a two-year extension since he just 53 - well below the retirement age of 62 prescribed for deputy governors.

The newspaper interprets the constitution of a search committee as a vote against Gokarn, and quotes a government official as questioning the move: “When the present one (deputy governor) has to be given extension or reappointment, where is the need for a panel?”

As far as the RBI Governor himself, his tenure ends next September, and the finance ministry can do nothing about it.

The Economic Times suggests that there is more to it than meets the eye in the finance ministry’s new-found enthusiasm for poring over the RBI’s account books. An anonymous finance ministry official is quoted as saying that since it is the government that tables the RBI’s accounts in parliament, it can take a look-see at how the RBI prepares them.

[caption id=“attachment_514745” align=“alignleft” width=“380”]  There is cause for suspicion that the ministry is trying to tell the RBI chief who’s boss after the snub it got over interest rates. AFP[/caption]

On the other hand, the newspaper quotes an unnamed RBI official as saying the review was uncalled for.

Relations between the RBI and the finance ministry hit a new low last week when Governor Duvvuri Subbarao declined to cut repo rates despite Chidambaram’s loud demands for it from various forums. When the 30 October monetary policy failed to give him his rate cut, a miffed Chidambaram wore his displeasure on his sleeve: “Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone.”

The RBI and the finance ministry have also not seen eye-to-eye on the issue of paying interest on CRR deposits - a practice that was discontinued in 2007 after an enabling government legislation.

The finance ministry has been using public sector banks - including State Bank of India Chairman Pratip Chaudhuri - to get the RBI to pay interest on CRR balances.

The finance ministry has a vested interest in this since paying interest will allow banks to earn more and write off more against bad loans. This, in turn, means public sector banks will need that much less capital from the government. But the amounts involved are not so big that the finance ministry needs to make a big issue of it.

Clearly, there is cause for suspicion that the ministry is trying to tell the RBI chief who’s boss after the snub it got over interest rates.

The larger point is this: if the monetary authority is supposed to act independently of the executive, maybe it’s time to take supervision of the central bank away from the government and make it directly accountable to parliament.

Putting the fox in charge of the henhouse is not a great idea.