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

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.

Comments made last week by S Gurumurthy, a Rashtriya Swayamsevak Sangh (RSS) ideologue, indicate as much. “As my understanding goes, the government is only asking for a formulation of a policy as to how much reserves the central bank must have. Most central banks don’t have reserves of this kind at all, only RBI has these kinds of reserves,” he said on November 15. If the central bank agrees to a redefinition, the excess will go to the government, irrespective of whether it wants it or not.

BEST-CASE SCENARIO

This will require both sides to retreat from their positions, signaling a compromise.

It won’t be easy to do so, because the agenda for Monday’s meeting is the one carried over from the previous meeting which ended in an acrimonious public fallout — and covering all the points listed above.

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