The usually relaxed lunch meeting between friends Gupta (a senior RBI staffer), Neelima (a retired bureaucrat) and Harish (a young IT employee) turned quite heated this week, after their chat turned to the face-off between the Reserve Bank of India and the government. This is what we heard when we planted a bug under their table.

Neelima: Good to see you two after so long. But why so late and why are you men so grumpy?

Harish: Had an argument with my wife about eating out too frequently. That’s the problem with marriage, madam, you lose all autonomy. Need permissions for everything and anything. And she wants me to spend Saturday morning standing in the ATM queue.

Gupta: Funny you should say that. The RBI office is agog with an autonomy debate too. Dr Viral Acharya just gave this masaledar speech at the AD Shroff Memorial lecture where he blasted the government for interfering too much in the RBI’s workings and trying to give it too many instructions.

Neelima: Guptaji, I don’t agree at all! Is it a good idea for the RBI Governor to be publicly warning the government in such strong language? Jaitleyji already has enough problems to deal with — oil and onion prices are shooting up, the rupee is misbehaving, there’s the Akshaya Patra of bank NPAs to clean up. There’s an NBFC crisis. Now the RBI has gone and made things worse.

Harish: What to do? Sometimes, if your wife gives you too much torture and you can’t talk back to her, you have to complain to others.

Gupta: He he, correct. It is not one incident that has triggered this, Neeluji, there are many. That’s why all the RBI top brass got together and egged on the DG to make this speech. We even got the speech polished up by a journalist. That’s where we got those nice punch-lines about ‘kiss of death’ and ‘igniting economic fires’.

Neelima: What has gotten your silent Governor so riled up? Isn’t it usual for the government and RBI to have disagreements?

Gupta: This went far beyond that, Neeluji. First, the government floated a proposal for a separate payments regulator, which is mischievous, because the country’s currency and payment systems are regulated by the RBI. Then, the new Right-wing officials it appointed to our Board were very demanding and vociferous on relaxing bank lending norms for Mudra and SME loans.

Neelima: Turf issues, is it? We IAS folk understand that well.

Gupta: There’s more. To prevent domestic banks from landing in hot water due to NPAs, the RBI has a Prompt Corrective Action (PCA) framework. In April 2017, it tightened this PCA to say that, for banks whose capital adequacy fell below 10.25 per cent, net NPAs shot up above 6 per cent or leverage went above 25 times, the RBI could issue a bunch of instructions. It could restrict their lending, stop new branch openings, clamp down on hiring, demand more capital etc. But the government is sitting on the RBI’s head to relax these rules for the 11 public sector banks which are under PCA.

Harish: I also have my salary account in a PCA bank only. This PCA seems to be like Abhimanyu’s Chakravyuha . Banks find it very easy to get into it, but don’t know how to get out of it.

Neelima : I do see sense in the RBI’s stand. Let some of these weak public sector banks be merged or shrunk. Every five or six years, they come down with NPA fever and we taxpayers have to pay their hospital bills.

Gupta: Now you are seeing my point. There’s another big issue. The RBI has paid a ₹50,000-crore dividend to the Centre out of its profits in FY18. That’s 63 per cent more than last year. But is the FM happy? No. The government cannot treat the central bank like its pet PSUs. The RBI decides on its dividend after transferring some profits to its contingency reserves, which are there to tide over unexpected crises.

Neelima: But I can’t help sympathising with Jaitleyji. He’s having a torrid time sticking to the fiscal deficit target this year. Government expenses in the first half have overshot the Budget by 3 per cent while revenues are short by 11 per cent. The Centre has already exhausted 95 per cent of its full-year deficit target. If the RBI relaxes PCA, it can save some money on bank recapitalisation, and extra dividend can help bridge the deficit.

Gupta: But that is short-termism, Neeluji. As the DG said, politicians are always playing T20 matches, with an eye on the next election. But the RBI is a test match player. It has the long-term interest of the country at heart.

Neelima: Who is watching test matches nowadays, Guptaji? Everyone watches T20 only! And if you keep losing the T20s, you will be dropped from the test team also.

Harish: Yes, I agree with Neeluji. In the long run, as Keynes saheb said, everybody is dead. See what’s happening to NBFCs after this IL&FS default. I hear they will be cutting back on their loans to retail folks and small businesses, because they are finding it hard to raise money from the bond market. IL&FS is RBI’s responsibility, so shouldn’t it be helping solve this problem?

Gupta: That is one of the issues on which the government is keen to use Section 7 of the RBI Act, which allows it to give directions to RBI ‘in public interest’.

Neelima: I agree that this sends out all the wrong signals. But Section 7 calls for a consultation with the Governor first, no?

Harish: That is like my wife consulting me on her decisions, Neelimaji. Whether I say yes or no, I know she is going to do it!

Gupta: Haha, good one, Harish. But seriously, the Modi government cannot afford to have a second RBI Governor leaving under a cloud.

Neelima: Insisting on autonomy from the government is fine, but isn’t the RBI accountable to citizens like us? The nation wants to know what it thinks about IL&FS, the NBFC crisis and the Rupee.

Harish:Hehe , it also wants to know why it didn’t speak up during note bandi.

Gupta: You people are incorrigible.

Neelima: Don’t feel so bad, Guptaji. The RBI and the FM have been fighting since the British era.

Harish: And we can feel good that they fight about different things each year. Under UPA, they used to fight about cutting interest rates, then about accounting for NPAs, now it is about reserves. Just like my wife and me. We never argue about the same things.

Neelima: And Harish, while taking pot-shots at the RBI, better remember that you are in the same position. You have the money, but it is your wife who has to run the household.

(The incidents and people in this conversation are entirely fictional.)

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