Modi Takes Over the RBI

As I opined in my previous article, the RBI governor Dr. Urjit Patel has now resigned finally after a long tussle with the Narendra Modi government. As I discussed earlier, Modi government is under intense pressure to boost the growth and employment figures in the run-up of its reelection next year. The only way in which governments know to boost growth is to increase spending on fiscal programs like the bullet train project or the smart city project or Swaccha Abhiyan etc., etc. And such increased spending is only possible when the central bank monetizes their ballooning fiscal deficit by printing currency notes and allowing commercial banks to boost their lending by relaxing regulatory norms. The problem of non-performing assets (NPAs) for Indian banks is very severe, and RBI was worried that situation will get out of hands if immediately something is not done about this explosive issue. That prompted RBI to tighten their lending norms, which Modi government didn’t like. Not only this, the Indian government is also eying RBI’s so-called excess reserve resources. All these has now forced the governor to resign.

On the very next day of Dr. Patel's resignation, Modi appointed his close ally from the time of demonetization exercise, which is now termed as a massive, draconian, monetary shock by the former chief economic advisor of Narendra Modi Mr. Arvind Subramanian, Mr. Shaktikanta Das as new RBI governor. The new RBI governor is a History major and is a former IAS bureaucrat. Immediately after his appointment Das gave a signal that he is in RBI to carry water for the Modi government. The finance minister also declared that the Modi government is openly taking over the control of the RBI in its hands.

What all these now means for all of us is that a big spending boost from the government is coming. This is more certain after Modi losing three important Hindi heartland states to Congress in local elections. This means more money creation out of thin air and lending. This will result into a severe bout of price inflation and a deeper boom and bust cycle. The worsening NPA problem will worsen further and put Indian banks at a greater risk of insolvency and bankruptcy. The Indian rupee will come under immense pressure too. Government bonds will also see a rating collapse. As investors lose their trust in the Indian economy, a quick exit of foreign investors will crash the Indian stock markets. In all likelihood we are seeing even tougher days ahead for the Indian economy and people.