Bones Of Contention

The RBI and the government are at loggerheads to settle on an appropriate economic capital framework for the apex bank.

- Clifford Alvares

WHEN THE RBI’S DEPUTY GOVERNOR, Viral Acharya, warned a few weeks ago that the “risks of undermining the Central bank’s independence are potentially catastrophic”, it opened a Pandora’s box, causing a furore in financial circles as it brought to the fore the ongoing huge differences between the government and the RBI in the handling of several issues including the liquidity squeeze.

“Governments that do not respect Central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution,” Viral cautioned in a speech that created a tornado in financial markets.

In the last few weeks, speculation has been rife that the government has been seeking Rs 3.5 lakh crore from the RBI to tide over “some” imbalances. The government, however, clarified that it is not seeking Rs 3.6 lakh crore or Rs 1 lakh crore as speculated, but only wants to fix the economic capital framework of the RBI.