Modi, Urjit discuss patch-up formula
The government seems to have woken up to the bad press it is getting in its face-off with the RBI. It is understood that RBI Governor Urjit Patel met Prime Minister Narendra Modi last Friday to discuss the sticking points between the central bank and the government, in the first sign of defrosting of ties.
Tensions between the RBI and the government had escalated recently, with the Finance Ministry invoking the neverused-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI Governor.
Sources said that the two sides have decided to reconcile their differences with each taking a step backwards. So, as a part of the patch-up formula, the Centre would soften its stand on seeking surplus reserves of the RBI and the central bank would cede to the demand for softening some of its lending norms.
Patel's meetings at the PMO came days before the RBI's crucial board meeting on November 19 when some of the contentious issues were to come up for discussion.
Sources told CNBCTV18 that since most of the issues were being sorted out, there would be no resignations on Mint Street.
As a part of this broad understanding, the Reserve Bank of India is likely to take some banks off its Prompt Correc-tive Action radar, allowing them to lend more. The curbs were imposed because the banks had a low capital base and were saddled with a heap of bad debt. The government had reasoned that the RBI curbs had gone too far and diminished the loans available for small and medium sized businesses.The Centre, as part of its end of the bargain, has decided not to push hard for the surplus reserves of the central bank to help fund its fiscal deficit, sources said. The RBI currently hands over its profits earned from various activities in the form of a dividend. But reports have claimed the government had wanted to dip into
Rs 3.6 lakh crore of RBI's capital reserves.
The RBI has consistently stonewalled the demand, and said the move had several pitfalls.
The government, in a cryptic statement two days ago, had denied seeking the money, but accepted that it wanted the RBI to fix an "appropriate" economic capital framework. Sources explained that the Narendra Modi government will now not ask the RBI for a special window for Non-Banking Financial Companies, similar to one allowed during the 2008-2009 global financial crisis.(The parallel banking sector has been hurt by the defaults in Infrastructure Leasing & Financial Services.)
Last month things came to a head with RBI deputy governor Viral Acharya saying that undermining RBI's independence may be catastrophic. "Governments that do not respect central bank's independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution," he had said in a speech.