Yaga Venugopal Reddy, one of the finest governors the Reserve Bank of India (RBI) ever had, loved to speak in double negatives at times.

I remember one particular interaction with Dr Reddy vividly, when he was talking about heeding the government’s advice on interest rates. It was after a credit policy meeting, and Dr Reddy was giving his customary media interviews. I remember asking him whether the RBI was open to heeding the government’s advice on lowering interest rates. In his inimitable style, Dr Reddy told me that just because it was the government giving the advice, it didn’t mean the RBI would not listen to it. Simply put, this ‘Reddyism’ meant that if the RBI felt that the government’s advice was correct, it would have no hesitation in heeding it.

Those were different days. These days, the government and the RBI have been locked in a bitter tussle which, to the horror of the financial markets, has become public and has been dominating the front pages of newspapers. Hardly ever have the differences of opinion between the government and the country’s central bank become so public, threatening to throw the markets into a tailspin, with rumours, till recently, swirling that the RBI governor, Urjit Patel, was on the verge of putting in his papers. Thankfully, the RBI board meeting of November 19 concluded with no such dramatic developments and, from what the media has gathered, without any acrimony either, though the meeting lasted over nine hours.

Traditionally, the government and the RBI often find themselves on opposite sides on several issues, particularly on the growth-versus-inflation debate. The government’s political compulsions and growth imperatives often lead it to demand a softer stance from the central bank on matters like interest rates, even as the central bank’s objective of controlling inflation and ensuring financial stability lead it to move in the opposite direction.  Palaniappan Chidambaram’s famous statement as finance minister— “if the government has to walk alone on facing the challenge of growth, then we will walk alone”—when the RBI under then governor Duvvuri Subbarao refused to cut rates, is a good example of the periodic skirmishes which take place between the two sides. Chidambaram’s comment made headlines at that time because it was one of the rare cases of a finance minister making his displeasure on rates public.

The recent headline grabbing confrontation between the government and the RBI is far more intense and, unfortunately, much more public. Ever since the October board meeting of the central bank, and the speech thereafter by deputy governor Viral Acharya warning about the effects of undermining the RBI’s regulatory autonomy, the confrontation between the government and the banking regulator on a host of issues has been escalating, with talk of whether the government would use its powers under Section 7 of the RBI Act to give directions to the central bank and ensure it had its way. Ahead of the RBI board meeting of November 19, an independent member of the RBI board had, however, sought to underplay the tensions and told me that Section 7 would not be invoked and governor Urjit Patel was not going to resign since things would not escalate further.

The RBI statement, issued after the marathon board meeting of November 19, seemed to indicate that there was a cooling down of tempers in the boardroom.  Some key decisions were taken at that meeting. The RBI and the Centre would jointly set up a panel to decide on the terms of how much surplus the central bank would transfer to the government. The RBI board, the statement said, had also “advised” that the banking regulator should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to ₹25 crore, “subject to such conditions as are necessary for ensuring financial stability”.

The board also decided to retain banks’ capital requirement at 9%, but agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020. With regard to banks under Preventive Corrective Action (PCA), it was decided that the matter would be examined by the Board for Financial Supervision (BFS) of the RBI.

While the broad interpretation of the RBI statement and the outcome of the board meeting is that there has been a de-escalation in hostilities between the two sides and key issues like systemic liquidity, tough norms for banks and the level of reserves to be handed over by the RBI to the government are now being discussed, there is little doubt that something has changed fundamentally as far as government-RBI relations are concerned.

The government is no longer averse to getting its agenda discussed through the RBI board and, if necessary, seeking to push it through more aggressively than other governments may have done. The move to have a joint panel to decide the surplus transfer issue is one such example. Second, and equally important, is the RBI board’s advice on credit for MSMEs. This is bound to be viewed by RBI watchers as a significant shift to making the country’s central bank board more involved in decision-making, rather than leaving it to the governor and the RBI top brass.

Yes, the November 19 board meeting is a positive development in that hostilities have eased. Section 7 is not a discussion point, at least for now. But the coming days will show whether the two sides can really work together or whether this was a temporary truce to assuage the financial markets which were being shocked by the daily headlines. One thing, however, is certain: no matter what the RBI board members and bureaucrats say, there has been a fundamental shift in government-RBI relations. The jury will be out on whether that’s a good thing.

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