9659002] Mumbai: The RBI Board meeting on Monday is a crucial factor that can change relations between the government and…
9659002] Mumbai: The RBI Board meeting on Monday is a crucial factor that can change relations between the government and India’s reserve bank. The bitterness between the Ministry of Finance and the National Bank of India has reached a new high, with both camps in place. Board members belonging to different parts of the industry is torn between these two camps. At stake is an economy that seems to be heading for a recovery but as here are five issues that are likely to dominate the RBI’s meeting on Monday and their implications for the Indian economy:  (1) Raid on institutional credibility
The government has not only come after the RBI regulations but also its ball ance sheet. Itution is perceived to have the intellectual capital to determine the strength of its own balance sheet. Therefore, the government should give judgment to the technicians of RBI. Global investors prefer political stability, but they value more institutional credibility. Respecting the institutional credibility of RBI would calm global investors who would soon face uncertainty about national elections. The outflow of dollars may be worse if the central bank is described as a weakening.
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(2) Choking credit or avoiding crisis
The government accuses the central bank of stifling the banking system by unnecessary regulation. Some board members seem to share this view. Reducing Basel standards on capital can buy government time, but it would hardly help to reduce the capital injection. Public banks would need huge capital contributions regardless of whether their minimum capital adequacy ratio is 8% or 9%, simply because loan financing will remain high.
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(3) Build bridges, do not burn them
Government’s claim that RBI provides support to non-bank lenders is not unreasonable. Non-bank lenders have been a critical source of finance for small businesses as a last mile connection. After tax reforms and demonetization, small businesses suffer and deny them credit because exogenous factors are unfair. RBI also understands that banks without banks and banks are different and therefore rules must be different. Giving space to non-banks would go a long way to improve fund flow to the Indian economy without compromising on caution.
The main concern of central bank viewers is the possibility that political motivations sip into the RBI’s function. In fact, some board members are known to have special political connections. Major precautionary measures should be taken by the government and the RBI that political coercion – unless followed by sound economic logic – does not affect the central bank’s function.
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Responsibility is Good, Credibility Better
Globally, central bank behavior has been reviewed after the global financial crisis. The need for central banks to be recognized is acknowledged and RBI is not above this. To be fair, the central bank is responsible for the government and even the parliament. With that said, it should not be hesitant to explain why it does what it does in front of its board members. RBI would only strengthen its credibility in front of them.
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If media reports are any indications, the government and RBI are aware of the serious consequences of a breakdown between them. It’s time to bury the hatchet so that the economy can go safely on the path of growth.