Rau was the fourth governor of RBI and resigned in January 1957 after a seven-and-a-half-year term as Nehru sided with finance minister TT Krishnamachari and made it clear that RBI was part of “the various activities of the government”.

(This story originally appeared in on Nov 05, 2018)





Rau, a civil servant, was the fourth governor of RBI and resigned in January 1957 after a seven-and-a-half-year term as Nehru sided with finance minister TT Krishnamachari and made it clear that RBI was part of “the various activities of the government”.



“It has to advise government, but it also has to keep in line with government,” Nehru wrote in January 1957, while suggesting that Rau could resign if he thought it was not possible to continue. Rau put in his papers a few days later. It may sound ironical but the Narendra Modi government may tap into Jawaharlal Nehru ’s exchange with Sir Benegal Rama Rau , who quit as Reserve Bank of India governor due to differences with the government, in its battle with central bank chief Urjit Patel

Nehru said it would be “completely absurd” if the central bank followed a different policy because it did not agree with the government’s objectives or its methods. “You have laid stress on the autonomy of the RBI. Certainly it is autonomous, but it is also subject to the central government’s directions … Monetary policies must necessarily depend upon the larger policies which a government pursues. It is in the ambit of those larger policies that the RBI can advise. It cannot challenge the main objectives and policies of government,” asserted

The RBI believed that TTK’s Budget proposal would effectively push up interest rates and forwarded a resolution of the central board. “The board requests the government to consult RBI in advance on all matters which significantly affect the monetary structure and policy,” the board said on December 12,

A fortnight later, Rau responded to Nehru’s letter saying that despite differences on several issues, nothing had leaked out from RBI. He then wrote that the government could reject RBI’s advice though it should be given an opportunity to place all facts and its view before a decision was taken on “technical and sometimes complicated monetary

Rau had accused TTK of “rude behaviour” over differences that began over a Budget proposal. TTK had referred to RBI as a “section” of the finance ministry and described it as “reserved”, as well as expressed doubts in Parliament “as to whether it is capable of doing any thinking”. In a letter to Rau, India’s first PM and Rahul Gandhi ’s great-grandfather, wrote: “It (RBI) has to advise government, but it also has to keep in line with government.” He suggested the governor could resign if he thought that it was not possible to continue; Rau put in his papers a few days later.Nehru.“When you talked to me I pointed out to you that it was for the central government to lay down policies and the RBI could not obviously have policies contrary to those of the central government. You agreed with this. And yet I find in your memorandum a different point of view,” he added.1956.The same day, Nehru wrote to the governor pulling him up for his “improper approach” which was seen to be “agitational” against the Centre.issues”.The then governor also took “strong exception” to some of Nehru’s comments on not supporting government policies and said the consultations over the Budget proposal were inadequate.In the Budget, the government had proposed to increase the stamp duty on an instrument used by lenders to get loans at a discount to RBI’s key policy rate — the bank rate. RBI argued that the higher stamp duty, which it said was decided without prior consultation, would push up the bank rate by half a percentage point. Parallels are being drawn between the developments six decades ago and the current power tussle between the Centre and RBI — although in that instance, the central bank had gone out on a limb to criticise a Budget proposal whereas it’s the government that is now unhappy with the RBI for not taking on board its concerns about the economy.While most governments and the central bank have had differences over issues ranging from interest rates to regulations, the current rift has widened to an extent that the finance ministry has sought formal consultations with the governor in what is one step short of invoking Section 7 of the RBI Act, a provision that has never been used.The government has been pushing RBI to address its concerns related to providing support to non-banking finance companies, ravaged by the impact of defaults by IL&FS, in addition to addressing the credit needs of small businesses and reviewing the prompt corrective action (PCA) framework dealing with weak banks.On October 26, matters came to a head after RBI deputy governor Viral Acharya spoke in public on central bank independence. The statement came days after a marathon board meeting where the Centre and some of the directors pushed RBI to heed its suggestions.