Use caution or brace for slowdown: Experts

Hyderabad: With the stand-off over the Reserve Bank of India’s autonomy reaching its fever pitch, economists advised caution as the showdown between them on a host of issues, including a proposal to dip into the central bank’s reserves, could impact the economy.

“The standoff is over three issues — namely the government’s a proposal to wean away RBI’s regulatory powers over payments bank and the central bank’s approach towards bad loans and easy lending to MSMEs,” said Subhanil Chowdhury, assistant professor at Institute of Development Studies.

The other issues which reported have driven wedge between the Mint Road and the North Block are the government’s proposal to dip into RBI reserves to fund its fiscal deficit.

Unconfirmed reports suggest that the government has already invoked the never-used clause in Section 7 of the RBI Act to begin consultations with Reserve Bank.

The clause empowers the central government to order the RBI to take specific action on the issues that it considers to be of public interest.

While the difference of opinion between the Reserve Bank and the finance ministry officials is not new, the invocation of mandatory clause in the RBI Act hints at hardening of positions by both the authorities and complete breakdown of communications.

“Section 7 of the RBI Act was never used by any government in around 70 years. It was not used during economic stress in 1990s, or during the global recession in the aftermath of Lehman Brothers collapse or when US Fed’s tapper tantrums hit the economy badly in 2013. So the invocation of Section 7 by the government makes one wonder how bad is the economy,”  he explained.

Mr Chowdhury said the invocation of Section 7 appears to be a step taken by the government in panic as the economic indicators like stocks, current account deficit and rupee are not favourably placed in the election season.

“We should have never gotten to this point," said Ananth Narayan, associate professor (finance) at SP Jain Institute of Management and Research in an interview to Bloomberg. He said the government may be trying using RBI's reserves to fund fiscal deficit.  “Rather than taking on long-term reforms, the government thinking of short-term steps. The entire ecosystem that was supposed to keep the system safe does not come out looking good.”

Even while counselling caution to Reserve Bank on regulatory steps, Mr Chowdhury said the government should not undermine institutions like RBI.

“If the government wants to create another regulator for payments banks or issue directions on how to operate, it indicates the government's lack of faith in the RBI's ability. If the government itself does not trust the RBI, how could it expect people have faith in it.”