Demonetisation to Yes Bank: RBI's top 10 controversies in Modi regime

As the Reserve Bank of India celebrates 90 years of its existence, we list here the 10 big controversies concerning the central bank since the BJP, led by Prime Minister Narendra Modi, came to power in 2014.

On November 8, 2016, the Central government announced the demonetisation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi series as a drastic measure to curb illegal cash holdings ('black money') and counterfeit currency.

The RBI was put at the forefront of implementing this policy, which led to widespread criticism due to poor execution, severe cash shortages, and significant inconvenience to the public. The move was questioned for its impact on the economy, with sectors dependent on cash transactions suffering massive setbacks. Critics also debated the RBI's independence in the decision, given the suddenness and secrecy surrounding the announcement.

The demonetisation failed miserably, as more than 99 per cent of the currency was returned to the country’s banks, indicating that it failed to wipe out black money from the economy. The move, however, wiped out over 1 per cent of the country’s GDP and cost at least 15 lakh jobs. The farmers had a difficult time selling their Rabi harvest. Since they had no cash to pay to buy seeds and fertilisers, they were forced to borrow at extremely high-interest rates.

Urjit Patel resigned as RBI governor in December 2018, citing personal reasons. However, his departure was widely attributed to ongoing tensions between the RBI and the government. These tensions revolved around the RBI's autonomy and reserves and the government's desire to have a greater say in the central bank's regulatory decisions. Patel's resignation underscored concerns about the government's pressures on the RBI, impacting its ability to operate independently.

The autonomy of the RBI has been a recurrent theme of contention. A public example of this was a speech by deputy governor Viral Acharya in 2018, in which he highlighted the importance of the central bank's independence, implicitly criticising government interventions in its operations. The government's attempts to influence the RBI's policy decisions, especially regarding the central bank's reserves and lending norms, have led to debates on the RBI's independence and its role in the economy.

The Punjab and Maharashtra Co-operative Bank (PMC Bank) crisis emerged when it was revealed that the bank had engaged in fraudulent practices, leading to over ₹4,355 crore in non-performing assets. The RBI imposed withdrawal limits for depositors, causing panic and distress among the bank's customers. The crisis brought to light regulatory lapses and the need for stronger oversight of cooperative banks by the RBI.

Yes Bank faced a severe liquidity crisis due to its inability to raise capital to cover its non-performing assets. The RBI intervened by placing the bank under a moratorium, capping deposit withdrawals, and devising a rescue plan involving other banks. The crisis raised questions about the RBI's supervisory mechanisms and the overall health of India's banking sector.

The issue of non-performing assets (NPAs), or bad loans, in the Indian banking system has been a persistent problem. The RBI has faced criticism for not taking stringent enough measures early on to prevent the accumulation of bad loans. Although the RBI introduced various frameworks for stress testing and resolution of NPAs, critics argue that these measures came too late.

In 2018, several states in India reported acute cash shortages and non-functional ATMs, leading to public inconvenience and raising questions about the RBI's cash management strategies. The shortages were attributed to logistical issues and the uneven distribution of currency, but the episode highlighted challenges in the RBI's currency supply chain management.

The RBI's Monetary Policy Committee (MPC) has faced scrutiny over its decisions on interest rates, impacting inflation, economic growth, and the profitability of the banking sector. Critics have argued that the RBI has either been too cautious or aggressive in its rate decisions, affecting various stakeholders differently.

In response to the economic impact of the COVID-19 pandemic, the RBI allowed banks to restructure loans without classifying them as non-performing assets to provide relief to borrowers. While intended as a temporary measure to mitigate financial stress, there were concerns that this could lead to a lack of transparency in reporting the health of the banking sector's loan books.

The RBI's decision in 2019 to transfer ₹1.76 lakh crore to the government, based on the recommendations of the Bimal Jalan Committee Report on the Economic Capital Framework, stirred debate. Critics questioned whether this move would deplete the RBI's reserves, potentially weakening its financial stability and ability to respond to future economic crises.