Foolish to use threats when you can't win.

Recently there has been intense bad blood between the government and the Reserve Bank Of India (RBI). The RBI did not reduce interest rate when asked to, gave only Rs 306.59 billion as dividend in 2017, much lower than Rs 580 billion demanded by the government and has not eased its restrictions on banks with excessive bad loans. For its part the RBI is irked by the churlish manner in which the government is trying to exert its power, first, by appointing its stooges on the board and second, by threatening to invoke Section 7 of the RBI Act to force the RBI into submission. In response there were rumors that the Governor of the RBI Urjit Patel may resign, which would have caused the rupee to fall, foreign investors to sell out and even a fall in our credit rating. That would have been catastrophic with only 6 months to go before general elections in May next year. In a panic the government quickly backed down and issued a statement supporting autonomy for the RBI. Why is the government embarked on this suicidal course? Because it wants to loot the reserves held by the RBI, amounting to Rs 10 trillion, wrote L Venkatesh. "Of this Rs 7 trillion is because of the revaluation of the gold and foreign exchange that it holds. RBI also has contingency (and asset development) reserves of Rs 2.5 trillion, which is the sum total of the profits it has made over the last many decades." The government wants to use this money to distribute more handouts to win next year's elections but most experts say that "the capital of central banks of countries with current account surpluses can't be compared with countries that perennially run current account deficits and bridge their deficit with foreigners bringing capital flows". Which means that foreigners will not want to invest in India if they know that they may not be able to get their money back because the RBI has no reserves. India's current account deficit is expected to widen to 2.8% this financial year but this may increase further if sanctions on Iran push the price of crude oil back up. Even if India gets a waiver on importing Iranian oil how will we pay for it if the US bans payment in dollars and threatens any bank that handles such payment. Maybe we could pay in rice and wheat which will be procured in excess this year to placate farmers before elections. Why should this government use all the money, collected over decades and many governments, to bribe voters? Cristina Fernandez fired the head of Argentina's central bank when he refused to release reserves to pay off foreign debts. Today, Argentina's economy is hanging by a thread of IMF loans. This is what RBI Deputy Governor Viral Acharya warned of in a speech a week back. Fools use threats because they don't understand. They may yet use it.