All eyes on RBI meet today amid mixed signals on truce with govt

MUMBAI: If the acrimonious run-up to a key board meeting of the Reserve Bank of India (RBI) is any indication, investors should brace themselves for a period of uncertainty. Then, if buzz in Delhi’s power corridors about both sides employing back-channels is to be believed, everyone can breathe easy.

Much will depend on the stance RBI, particularly its reticent and reserved governor Urjit Patel, adopts at the central bank’s board meeting on Monday; so far Patel has not signaled his intent, adding to the suspense. Indeed, as is his wont, he has not spoken at all. Either way, there is considerable nervousness in policy circles and markets, both local and global, on the denouement of this confrontation between RBI and the Union government.

The two have disagreed before, but never has there been as aggressive a public articulation of opposing views as has been seen in recent weeks — by deputy governor Viral Acharya on behalf of RBI, and the central bank’s director S Gurumurthy on behalf of the government.

The points of discord include relaxation of the so-called prompt corrective action (PCA) of several state-owned banks that curbs their lending activities; aligning capital adequacy norms for Indian banks; addressing the liquidity squeeze faced by small and medium enterprises; and need for a new capital framework for RBI.

The last is a sanitised way of describing ways to define the quantum of reserves of the central bank. Although the government has clarified that it doesn’t want this surplus, it has indicated that it wants to define how much this should be.

The proportion 13-14% has been discussed in government circles; RBI’s current reserves are around 27% of its assets — or roughly, ₹10 lakh crore.

THERE IS NERVOUSNESS IN POLICY CIRCLES AND MARKETS, BOTH LOCAL AND GLOBAL, ON THE DENOUEMENT OF THIS CONFRONTATION