Reserve Bank of India

The economy comprises of many different bodies, households, and corporations that each have a unique role. While that is true, no single body has as much stake and influence in the economy as the government does. The decisions taken by the government have a massive impact on any economy, no matter its size or sophistication. This is so because the government:

1) Employs(in the public sector) a significant portion of the workforce.

2) Is responsible for massive spendings(the salaries for the public sector jobs are no small part of this).

3) Are the largest borrowers in the world debt markets(for their spendings).

Government policy is ultimately expressed through its borrowing and spending activities. These policies' main goal is to ensure decent growth of the economy while maintaining the inflation rate.

The two types of government policies that can affect the economy are: monetary policy and fiscal policy.

Monetary policies(decided by the central bank) try to get to the intended outcome by influencing the economy's quantity of money and credit.

Meanwhile, fiscal policies are the government's decisions about its taxation and spending.

In India, the monetary policies are decided by RBI(Reserve Bank of India), while the Ministry of Finance handles fiscal policies.

The central bank is a public institution that controls monetary policies in a country/group of countries, with its main objectives being price stability and employment growth. India's central bank is known as the Reserve Bank of India(RBI). It started as a private bank but was nationalized in 1949 to coordinate the government's policies and that of the central bank.

STRUCTURE OF RBI:

The upper echelon of the RBI is a 21-member central board of directors, composed of:

• The Governor.

• Four deputy governors.

• Two finance ministry representatives (the Economic Affairs Secretary and the Financial Services Secretary.)

• Ten government-nominated directors.

• Four directors who represent local boards for Mumbai, Delhi, Chennai, and Kolkata(Each of the local boards has five members who represent regional interests and co-operative and indigenous banks' interests.)
  

The Government of India typically appoints the governors for a three-year term.

During the time of the Modi Government, three governors headed the RBI:

1) Raghuram Rajan(2013-2016)

2) Urjit Patel(2016-2018)

3) Shaktikanta Das(2018-present)

MAJOR CHANGES IN RBI DURING MODI GOVERNMENT:

1) Raghuram Rajan(2013-2016):

According to Raghuram Rajan, lower inflation, increased savings, and deepening financial markets were his targets as the RBI governor.

In 2015, the RBI led by Raghuram Rajan and PM- Narendra Modi led BJP agreed to a monumental change in monetary policy by introducing inflation targeting to reign in the volatile price rises of India.

During his period, Rajan also changed the GDP calculation method from using the WPI to the CPI. In the CPI, food prices have a higher weightage while the WPI gives more weight to the manufactured goods.

In his own words- "Inflation should be measured based on the rise in the price of a basket of inflationary items that directly affect the common man. CPI-based inflation captures this better than WPI-based inflation."

As Governor of RBI, Raghuram Rajan brought down retail inflation (CPI inflation) from 9.8% in 2013 to 3.78% in 2015-the lowest since the 90s.

During Rajan's term, the Indian government was trying to increase financial inclusion through Pradhan Mantri Jann Dhan Yojana, and he, too, did the same. Under his governance, the RBI licensed two universal banks and eleven payment banks to extend banking services to the nearly two-thirds of the population who were still deprived of banking facilities.

At the same time, he also permitted banks to charge customers for conducting ATM transactions beyond a particular frequency. This seems like a contradiction to the attempts of increasing financial inclusion.

2) Urjit Patel(2016-2018):

In August 2016, Urijit Patel was appointed as the Governor of RBI.

Setting up of The Monetary Policy Committee to decide on Monetary Policy was first proposed by the Urjit Patel Committee. The Monetary Policy Committee is responsible for fixing the benchmark interest rate in India. The committee comprises six members - three from the Reserve Bank of India and three external members nominated by India's Government.

Critical decisions regarding benchmark interest rates used to be taken by the Governor of the Reserve Bank of India alone before establishing the committee. The Governor of RBI is appointed and can be disqualified by the government anytime. This led to uncertainty and friction between the government and the RBI, especially during times of low growth and high inflation.

Shortly after his appointment, India's government demonetized the ₹500 and ₹1000 banknotes with the stated intention of curbing black money, corruption, and terrorism. This move by the government is seen as a failure.

Meanwhile, tensions were rising between the RBI and Modi's government, especially with the latter putting immense pressure on the former to act in a way favorable to it. The government (reportedly) wanted the RBI to allow ailing state-owned banks, groaning under bad loans to industries, to resume lending to small businesses. It even wanted RBI to lower interest rates to inject much-needed liquidity into the economy.

Reports also said that the government wanted to access the RBI's surplus reserves to stimulate the economy with a big public spending spree to gain voters' confidence before the elections.

The RBI, being an autonomous institute with the sole purpose of ensuring the health of the economy, of course, should not and must not be influenced by the government (a body which may, in some instances, have selfish motives).

In the end, the friction led to Urijit Patel resigning from the post of Governor of the Reserve Bank of India. Though he has stated personal reasons for resigning, the situation, context, and problems at the time lead us to believe otherwise. Raghuram Rajan, the ex-RBI Governor, has stated that Urjit Patel's resignation was a "note of protest."

3) Shaktikanta Das(2018-present):

Shaktikanta Das is a retired 1980 batch Indian Administrative Service (IAS) officer of Tamil Nadu cadre. He was appointed as the Governor of the Reserve Bank of India by the ACC in December of 2018 for a period of three years, replacing Urjit Patel. Das' appointment as RBI governor received mostly positive responses. The market reaction to Das' appointment was positive, with BSE SENSEX gaining 629 points and NIFTY 50 increasing by 188 points. In spite of this, the appointment of an ex-IAS as the governor(though not unprecedented) leads us to believe that there is a chance that the government appointed him to ensure more control over the autonomous public institution.

Urijit Patel wanted to clean up a banking system diseased with the worst non-performing loan ratios among the world's major economies. He had repeatedly clashed with the government about relaxing lending rules for some weak state-run banks. Das eased those curbs in 2019, including allowing weak banks to lend again.

The RBI's decision to remove a number of public sector banks from the strict lending restrictions relatively soon after the new Governor's appointment suggests a softer approach of the RBI with regard to regulatory supervision of the troubled public sector banks.