North Block Vs Mint Street

India Business Journal - - CONTENTS -

Af­ter

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.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.