RBI and Government's Conflict – Understanding it in Detail - Seeker's Thoughts

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RBI and Government's Conflict – Understanding it in Detail

RBI- What is it?
RBI stands for Reserve Bank of India. RBI regulates the issue of Bank notes and keeping reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. It is to have a modern monetary policy framework to meet the challenges of an increasingly complex economy. It has to maintain price stability while keeping the objective of growth.

What happened- understanding the conflict?
In recent years there have been various frauds and scams with Banks for that RBI was blamed. RBI is the sole regulator of the banks but still it feels that it does not have enough power over banks and decision making is compromised.
Though RBI can appoint nominee director on bank boards and can lead to physical inspection and financial audit. It also looks after merger of Banks.
Today Indian Banking Industry suffers with stressed assets and non-performing assets. The regulator has scrapped all the past restructuring mechanism and tightened the norms. Delay in paying loans now can lead to the Insolvency Court and attract punitive measures.
The RBI has issues PCA or Prompt Corrective Action Framework – which restricts weak banks from lending and this contribute to liquidity crisis as government accuses the RBI. Government also wanted special dispensation by the RBI to help non-banking finance companies (NBFCs) apart from relaxed norms for lending to micro, small and medium enterprises.
Interest rates have been the reason of conflict as well, the government wanted reduced interest rates when oil prices were low, and inflation was not a dominant concern either. However the Monetary Policy Committee has not reduced the interest rates.
The working
The RBI lends money to Banks which are commercial in nature and even it sells and purchases the government securities.  
Effect of the conflict
This is a matter of concern while there are so many internal concerns as well as external concerns like trade sanctions, hyper protectionisms, rising oil prices and these two Government and RBI are fighting with each other.
RBI is in right place when it placed weak banks under PCA , and it has helped in controlling the problem of bad loans as RBI said. The government PCA diluted as it wants bank lending to rise, and it will reduce liquidity crisis. NBFCs, Housing Finance Companies and Micro Finance institutions suffered due to non- liquidity.
Therefore, instead of fighting with one another there could be other ways to ease liquidity as addition to the routine Open Market Operations.