Whose vote will tilt the scales at the next RBI meeting on Nov 19?

Two government officials and four deputy governors won't vote at the crucial meeting

With a war simmering between the government and the Reserve Bank of India (RBI) over certain policy issues, the focus is now on the sway the government’s ‘men’ in the RBI have on the eventual outcomes.

Among the things the government wants done by the RBI are doing away with the requirement on exposure limit of 20 per cent of foreign portfolio investments in corporate bonds of a single corporate group; removing the requirements of mandatory hedging for infrastructure loans of less than 10 years’ maturity; setting up a special refinance window for non-banking financial companies, housing finance companies and mutual funds; creating a facility for banks to raise $30 billion and a review of the economic capital framework for bringing it in line with the requirements of the RBI Act.

But RBI’s deputy governors like Viral Acharya and N S Vishwanathan have publicly taken on the government over interference in its functioning as an independent regulator of India’s banking system. Former governor Raghuram Rajan, too, in a hard-hitting interview with a business news channel, has supported the cause.

Technically, all the governors, deputy governors and directors are the government’s appointees. According to the Reserve Bank of India Act, 1934, the Central Board of Directors consists of a governor and no more than four deputy governors nominated by the central government. In addition, there are 14 other directors and a government official who can be nominated by the central government. At any point in time, the RBI’s board cannot consist of more than 20 members including the Governor. At present, it has 18 members, including Governor Urjit Patel. Two of the members are government officials – Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar. Additionally, there are at least four industrialists, including Bharat Narotam Doshi, chairman of Mahindra Intertrade and director at other companies like Dr Reddy’s Labs and Godrej Consumer Products, on the RBI’s central board of directors. Others are Tata Sons Chairman N Chandrasekaran, Teamlease Services Chairman Manish Sabharwal and Sun Pharma Managing Director Dilip Shanghvi.

Besides industrialists and government appointees, there also are ex-bureaucrats and academics like Sudhir Mankad, who retired as chief secretary in the Gujarat government in 2007, when PM Narendra Modi was the chief minister of that state. Another member is Ashok Gulati, the youngest member of the economic advisory council during Atal Bihari Vajpayee’s tenure. Also, RSS ideologue S Gurumurthy was recently appointed to the central board of directors of the RBI. Another member with RSS links is cooperative banker Satish Kashinath Marathe; he was reportedly associated with the BJP’s student wing, Akhil Bharatiya Vidyarthi Parishad (ABVP), in the past.

Bharat Narotam Doshi, Sudhir Mankad and N Chandrasekaran were appointed to the RBI’s board in March 2016. Ashok Gulati, Rajiv Kumar and Manish Sabharwal were appointed in February 2017. Dilip Shanghvi, who was appointed as a director on the western regional board of the RBI in 2017, was moved to the central board of directors in February 2018. Gurumurthy was appointed in August 2018.

There are two other deputy governors in addition to Acharya and Vishwanathan – BP Kanungo and Mahesh Jain. Other directors include former deputy comptroller and auditor general Revathy Iyer, Research and Information System for Developing Countries (RIS) Director General Sachin Chaturvedi and bureaucrat-turned-academic Prasanna Mohanty.

At the next board meeting on November 19 this year, the government’s demands are expected to be considered by the RBI board again. There seem to be concerns over the government’s demand for a share of the RBI’s Rs 9.6-trillion reserves. Reports suggest that the government wants to manage almost Rs 3.2 trillion, or a third of the total, jointly with the RBI. But the central bank, averse to the idea, is saying that any whittling down of its reserves will undermine its credibility and create trust issues with banks and the public. The RBI’s logic: If it doesn’t have enough reserves, the banks won’t trust it anymore. The RBI’s reserves, according to its annual report in 2017-18, consisted of Rs 6.9 trillion in the currency and gold revaluation account, Rs 2.32 trillion in the contingency fund, Rs 228 billion in the asset development fund and Rs 133 billion in the Investment Revaluation Account (Rupee Securities).

The RBI in 2017-18 had transferred to the government Rs 500 billion of its surplus –substantially more than the Rs 306 billion it transferred the previous financial year but less than the Rs 659 billion in 2015-16.

Reports suggest that the government in particular wants a share of the contingency fund, which the RBI keeps to “absorb unexpected and unforeseen contingencies”. Coincidentally or otherwise, the RBI hasn’t been able to raise its contingency reserves like it did in the past. During the first four years of the Manmohan Singh-led United Progressive Alliance government in its second term, the contingency fund was increased by almost Rs 631 billion to Rs 2.2 trillion. By comparison, the RBI has been able to increase the contingency reserve by just about Rs 105 billion during the first four years of the Modi government.

According to the RBI Act, 1934, none of the deputy governors or the government officials are allowed to vote. This means that Viral Acharya, B P Kanungo, N S Vishwanathan and Mahesh Jain, in addition to Rajiv Kumar and Subhash Chandra Garg, won’t vote at the next meeting.