RBI BOARD IN THE SPOTLIGHT
Independent directors may take crucial decisions if government and central bank fail to resolve conflict
The Reserve Bank of India’s (RBI’s) board meeting on November 19 will be one of the most anticipated events in the recent history of the central bank. Coming after a public stand-off between the government and the RBI for over a month, both sides will present their views on the problem areas.
At the core of the dispute are a few key issues. One, 11 public sector banks (PSBs) are under the RBI’s prompt corrective action, which curtails their lending ability. The finance ministry wants the RBI to relax some of the constraints. The government is also concerned about liquidity and wants the RBI to open a special refinance window for non-banking finance companies and mutual funds. The RBI’s dividend payment is also a bone of contention.
While Department of Economic Affairs Secretary Subhash Chandra Garg has clarified that the government is not asking RBI to transfer ~3.6 trillion or ~1 trillion, it is proposing to discuss and fix an appropriate economic capital framework, and excess reserves beyond the central bank’s requirements could then be transferred to the exchequer. There are also other concerns such as regulation of stateowned banks and setting up of a payment regulator, where the two sides are not aligned. The RBI, too, wants to remove its nominee directors from PSB boards, which it sees as an inherent conflict of interest, while the Centre wants it to supervise banks.
On October 26, RBI Deputy Governor Viral Acharya in his speech on protecting the central bank’s independence, said governments that do not respect it would incur the wrath of financial markets. The speech didn’t go down well with the government and Garg took a jibe a week later saying the rupee had appreciated against the dollar, crude oil had declined, stock markets were up 4 per cent in a week, and bond yields were below 7.8 per cent. He asked, “Wrath of the markets?”
Garg is expected to make a presentation to the RBI board on the government’s concern areas. If the two sides do not come to an agreement then some of the issues may be put to vote, perhaps the first time in the central bank’s history. The board composition then becomes relevant. Of the 18 board members, four RBI deputy governors and the two nominee government officials – Garg and Department of Financial Services Secretary Rajiv Kumar – cannot vote.
Only the 11 independent directors are eligible to vote with the RBI governor having a second or casting vote in the event of tie. Here's a closer look at the board members.