India's central bank dilemma

There are two important takeaways from the deposition of Reserve Bank of India Governor Urjit Patel before the Parliamentary Standing Committee on Finance last week. First, the banking industry is over the hump on non-performing assets (NPAs), which peaked in the quarter ending March 2018 at 11.18% of advances. Both gross and net NPAs have registered a decline for two consecutive quarters - June and September 2018. Crucially, there has been a sharp fall in slippages (fresh NPAs added to the existing heap) from 7.3% in March 2018 to 3.87% in September. This is certainly good news as it indicates that the skeletons are mostly out of the cupboard now. Of course, there is still the onerous task of resolving the bad loans stock, which is at a little over ?10 lakh crore now. Profitability of banks will continue to remain under stress as they provide for the bad loans in their books and/or take hair-cuts on recoveries through the insolvency process. Meanwhile, banks will also have to be wary of their small loans portfolio, especially those made under the Pradhan Mantri Mudra Yojana, which already add up to 6.77 lakh crore. These will need close monitoring.

The second important aspect of Mr. Patel's deposition was his spirited defence of the RBI's autonomy. Though he was careful not to say anything that would break the détente forged by the Centre and the central bank at its last board meeting on November 19, he made three forceful points: that the RBI's autonomy is important to protect depositors' interests; monetary policy has to be the exclusive domain of the RBI; and its reserves are central to maintaining its AAA rating. These statements are probably aimed at nipping in the bud any attempts to change the governance structure of the central bank. After the last board meeting, there have been reports that the Centre is planning to push for board committees to be set up to "assist" the RBI in the discharge of its work. Monetary policy is anyway the preserve of the Monetary Policy Committee created two years ago under the RBI Act, but there are other equally important functions which the Centre may be attempting to control through the board. The issue of autonomy is clearly the gorilla in the room and driving it out is not going to be an easy task. Yet, for the Centre and the RBI there is no alternative but to continue talking on this subject even while ensuring that it does not cast a shadow over their other respective roles and responsibilities. The issue of RBI autonomy is not something that first emerged during this government's tenure, nor is it likely to be solved in its remaining tenure.