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Essay writing -RBI differs with Government on FOUR issues



RBI  differs with Government on 4 issues

Differences between the Reserve Bank of India and government are out in the open with RBI governor D Subbaraoon Tuesday spelling out four where it doesn't see eye to eye with the finance ministry

Just a day after the government charted out a new fiscal consolidation plan to impress the RBI and induce a cut in interest rates, all the banking regulator did was cut the cash reserve ratio - the portion of deposits banks have to maintain with RBI - by 25 basis points, disappointing both the government and industry. Finance minister P Chidambaramissued a tersely worded statement in Delhi. "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." 

In a clear assertion that the finance minister was not impressed with RBI's guidance on interest rates, he said he had not read the last few paragraphs of the statement but if it holds out hope for the future he looked forward to that future. "Sometimes it is best to speak, sometimes it is best to remain silent. This is the time for silence," he said. 

In RBI's post monetary policy press conference, the RBI governor said the bank had differences of opinion on the issues of interest rates, issue of new banking licences, acknowledging measures for fiscal consolidation and Islamic banking. Although traditionally governments and central banks take opposite sides in the growth-inflation debate, in recent days both sides have come out with sharp statements digging in their heels. 

The governor too was quick to respond to the finance minister's observation. "The government is an important stakeholder in the Reserve Bank's policy. So we understand that the finance minister has a position, he represents the government, and we have respect for what the finance minister says," he said. 

When asked about the issue of fresh banking licences announced by the finance minister in his budget speech, Mr Subbarao reiterated RBI's position that this would require amendment to the Banking Regulation Act which would give RBI more regulatory powers. The governor said that the finance minister had asked RBI whether it would be possible to issue licences if more powers were given to RBI without amending the Act. However, the RBI's contention is that even if RBI were given the power to supercede the boards of banks, it would also need legal sanction to control investments by single entities buying more than 5% equity in a bank. Most importantly, RBI is seeking the power for consolidated supervision of groups that banks belong to as this would block ability of corporate-sponsored banks to indulge in regulatory arbitrage. 

The finance minister also made a strong pitch for easing given the centre's commitment to live within its means. "Government is doing its best to send the clear message that we are on the path of fiscal consolidation. It is my hope that everyone will read and understand the government commitment to path of fiscal consolidation," Chidambaram said. However, the RBI governor said fiscal deficit is a function of a number of factors and that everybody was looking for more details on how the fiscal roadmap is to be implemented. 

The central bank had also received a proposal to consider whether it was possible to permit Islamic banking in India. "Current banking regulation require interest rates. RBI charges interest on the funds it provides banks under repo and it also pays interest. Also, we do not permit risk financing while Sharia finance takes a position on this. There is the issue of dual regulation by Sharia board and RBI. We have said that should the government want this, they should have a new law" said Subbarao.

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