The governor of the Reserve Bank of India is like the husband who says he is the boss of the household, and has his wife's permission to say so.
Governors have operational autonomy, but the law gives the government power to dictate terms to RBI. That power has never been used despite increasing friction over the last decade between finance ministers and governors, chiefly monetary policy.
The two sides have just come close to crossing the Rubicon, following an increasingly fractious quarrel over interrelated issues: market liquidity, capital adequacy for banks, lending restrictions on government banks, and what was seen as an attempt by the government to raid the RBI's reserves to finance pre-election spending (parliamentary polls are due in May).
The result is an uneasy truce in which the finance ministry has gained the upper hand. The central bank can expect ever more pressure from New Delhi. While the RBI is perhaps the country's most respected economic institution, many economists rightly see it as bureaucratic, slow to change and in need of greater accountability.
The RBI board, where about half the voting members are nonexecutives, could provide greater impetus for change. The danger is that it could end up undermining RBI's autonomy and making it more vulnerable to political pressures.
The latest spat started when Viral Acharya, the RBI deputy governor in charge of macroeconomic policy, went public in late October with a blunt speech, which warned of the "wrath" of financial markets, if central bank autonomy were not respected.
It was clear that the RBI was making a stand, if not declaring war. In the wake of reports (later denied) that the government was asking the RBI to transfer 3.6 trillion rupees ($50 billion) from its reserves, there was heated speculation about protest resignations at the RBI, even from governor Urjit Patel.
In the event, a blowout was avoided. A prime minister and the governor held a discreet meeting. The government then shifted the field of battle to the RBI's 18-member board, to which it had recently sent some political appointees, including Swaminathan Gurumurthy, who had led the government's assault on the RBI.
After the board met for nine hours on Nov. 19, it looked as though the government had forced the RBI to concede ground. But more skirmishing is on the cards.
Very real issues are at stake. After payment defaults in September by the country's largest shadow bank, Infrastructure Leasing and Financial Services (IL&FS), credit flow to other shadow banks -- a vital source of funds for smaller businesses -- dried up provoking fears of a systemic crisis.
The government wanted the RBI to step in as a lender of last resort. The RBI balked but announced measures to ease liquidity. Not enough, said the government, anxious about business in a pre-election year.
The backdrop is the financial disruption caused by the government's decision two years ago to withdraw overnight high-denomination bank notes -- 86% of the currency -- in a futile attempt to tackle black money. Gross domestic product growth plunged so deeply that it had only recently recovered when the IL&FS crisis struck.
State banks, which dominate the market, are in little position to close the credit gap. The RBI placed tight corsets on 11 of 21 government-owned banks with the worst bad debt records.
It has resisted government pressure to relax these restraints but has announced steps that improve credit flow, including through capital adequacy rules.
Gurumurthy argues that there is no need for RBI to impose stricter norms than those stipulated by the international Basel Committee on Financial Supervision. But the RBI points out that Indian banks does not recognize bad assets as quickly as peers in other countries.
The controversial issue of transfers of funds from RBI's reserves to the government has been shelved with New Delhi saying it was not asking for any immediately. But the November 19 board meeting decided on a joint committee on the RBI's legitimate capital requirements. The implication is that anything over that could be transferred to the government.
Large transfers would be seen negatively in the markets, because it would automatically reduce the money supply and worsen liquidity.
The signal is that the RBI board, which is due to meet next in late December, will now play a more active role in decisions, giving a greater say to nonexecutive directors, who are businessmen, economists and others.
Interest rate changes, once decided by the governor, have been in the hands of a formally-constituted monetary policy committee since 2016.
The whittling down of the RBI's functions, with some critics wanting the central bank to manage nothing other than monetary policy, will continue.
Government borrowings, managed hitherto by RBI, are to be the responsibility of an independent debt management agency. Most recently, a government committee suggested that the payments system should be handled by an independent regulator; the RBI protested. Meanwhile, the governor's call for greater control of government-owned banks is unlikely to find a receptive ear.
The problem with taking away RBI functions is that expertise in handling tasks like debt management do not exist outside the central bank, and will have to be built.
The RBI's biggest defense against political meddling is its reputation. It is open to criticism today because it is seen to have fallen short on some of its supervisory functions. There is therefore a good argument for a more effective board that holds the management accountable (though appointment and sacking of the governor and deputy governors rests with the government).
To avoid the obvious danger of political pressures creeping in through the board, nonofficial directors, currently named by the government, could be appointed in consultation with the leader of the parliamentary opposition and a third neutral voice, like the chief justice of India. This already happens with other autonomous posts, like the head of the Central Bureau of Investigation.
Contentious issues will remain. As in other countries, friction between the government and the central bank may never disappear. But the sense of victory in the finance ministry is palpable. The husband is discovering that his wife no longer gives him permission to declare that he is the head of the household-and that may not be a good thing for the system.
T N Ninan is a columnist and former editor of Business Standard.