North Block Vs Mint Street
days of bitter acrimony, there is a welcome truce. Both the Centre and the Reserve Bank of India (RBI) have managed to strike a compromise on many contentious issues. There were fears that the last month's board meeting of the central bank would lead to further bad blood between the North Block and the Mint Street.
Fortunately, the board meeting set the stage for mutual understanding. The use of Section 7 by the Centre to "direct" the RBI to do its bidding, or the RBI Governor's resignation in a huff would have sent out the worst kind of signals to the financial markets, foreign investors and rating agencies.
Government nominees on the RBI board have accepted the central bank's position that Indian banks should have a ratio of capital to risk-weighted assets of 9 per cent rather than the 8 per cent that some have been seeking to give banks extra resources for lending. The RBI has had its way in this matter. But the government too has not lost out. Banks will have one more year's time to meet the target fully.
On two issues, the RBI will now be guided by the advice of its board - on funding of small and medium enterprises (SMEs) and on a review of the existing framework on Prompt Corrective Action (PCA). The RBI will now finalise a loan recast scheme for SMEs up to a ticket size of Rs 25 crore with conditions which would ensure that financial stability is not imperilled. Similarly, the RBI's Board for Financial Supervision will review the PCA framework to assess if some of the lenders can be freed from the restrictions to help boost credit flow. Moreover, a jointly-appointed committee will now decide on the contentious issue of transfer of RBI's 'excess' reserves to the Centre,
Notably, there is little on the table for NBFCs, whose alleged liquidity squeeze had been a major concern in government circles, apart from the liquidity accommodation that the RBI carries out, in any case. This is all to the good, as it is no tragedy if these shadow banks stop raising money through commercial paper at near-sovereign rates. They are now raising longer-term paper at rates that reflect their risk profile.
Overall, going beyond these issues, the NDA government's discomfort really seems to be with the RBI's overarching role in the Indian economy as opposed to its developed market counterparts which stick to monetary policymaking. Unlike those banks, the RBI in India doubles up as manager of foreign exchange reserves, runs the public debt programme and regulates banks and NBFCs. However, the RBI has fulfilled its many roles creditably over the years. Therefore, there is not much that is broken with the central bank that the government should be attempting to fix.
On the RBI's part, just as it forcefully articulated its pushback, it should engage more with the government and also communicate better. It is important for both the government and the RBI to resist the temptation of portraying the boardroom developments as a victory or a climbdown.
For now, both the sides have settled for a truce. But whether this is enduring will be known only when there is closure on issues such as liquidity for NBFCs and governance in RBI. The outcome of the board meeting holds out prudent lessons for both the government and the RBI. It is better to sit down and arrive at lasting solutions on vexatious issues. With peace firmly in place, it is the right time for both the Centre and the RBI to iron out all the differences.
The outcome of the board meeting holds out prudent lessons for both the government and the RBI. It is better to sit down and arrive at lasting solutions on vexatious issues. With peace firmly in place, it is the right time for both the Centre and the RBI to iron out all the differences.
Economy should emerge the real winner in the bitter row between the Centre and the RBI.