NEW DELHI / MUMBAI: The much-sought-after meeting in India's Reserve Bank of India is likely to insist that the government…
NEW DELHI / MUMBAI: The much-sought-after meeting in India’s Reserve Bank of India is likely to insist that the government immediately announces the implementation of decisions taken at the last meeting to prevent further confrontation.
As reported by TOI on November 2, the RBI dropped away from making decisions taken at the October 23 meeting of the public, even though they had agreed. At Monday’s meeting, sources said that the two government representatives on the board wanted RBI to announce the agreement reached to facilitate the credit flow to micro enterprises, small and medium-sized enterprises (MSMEs), a revised Banking Capital Adjustment Action (PCA) and adjustment of capital standards for Indian lenders in line with international standards instead of making them stricter. The government sees these as important steps to ensure more lending.
“The government wants the meeting to start from the end of last month,” said a senior government official TOI. The Center is also planning to use the Platform to seek measures to facilitate the liquidity pressures of non-bank finance companies (NBFCs) who have struggled with borrowing issues, as IL & FS began debiting debt repayment.
The important meeting that comes in the context of a threat of relying on the RBI Act, which is never used, 7, which allows the Center to issue directions, is kept carefully after the split between the RBI and the Treasury was released into the open last month (first reported by TOI). Just before, RBI Vice Governor Viral Acharya had cited Argentina’s example and suggested that a central bank’s independence could be “disastrous”. Many, including RBI sympathizers, believe that Acharia’s statement was unreasonably aggressive.
The statement came after an insignificant long board meeting where the government’s demand to address several of its concerns was not addressed. As reported by TOI on 31
October, the government also sought consultations with the RBI on three issues, as seen as a precursor to rely on Section 7. This is seen as the real flash point, as the Ministry of Finance and RBI did not share the same page on several issues for over a year.
For the central bank, the Government’s ultimate weapon, section 7, has emerged as a red line. People with knowledge of RBI’s thinking said that the approach would weaken the stand-off between the central bank and the government and deepen the crisis if Monday’s meeting was held under the cloud in section 7.
The government’s aggression can, however, be tempered by the anxiety that the governor and his two alternates can choose to leave if they are driven too hard and create an international perception.
RBI representatives are expected to impress their 18 members that stress in some sectors is not of equivalence but has more to do with a crisis of confidence among lenders and small businesses’ absorbent capacity. The central bank is likely to ballast its liquidity argument to be available by emphasizing that major redemption of short-term NBFC debt has taken place in November without any major negligence.
However, the government is unfounded with the measures taken by the regulator so far and believes that the pressure on financial companies makes its operations more difficult and affects the flow of funds to key sectors such as construction and small businesses.
Sources suggested that RBI-related issues relate to the credit flow to MSME and issues related to the NBFC. On the question of high reserves, they suggested that a large part of corpus is theoretical. It’s a problem that has been discussed since 1986, when the Finance Secretary S Venkitaraman was involved in a bitter blow with RBI governor RN Malhotra to seek a higher proportion of the surplus.
The government has not made any secret of its wish that the central bank should be on board – and has received too little criticism. According to a former central bank, unlike the United States Federal Bureau, the RBI Board contains people from different societies. They have included executive directors of highly indebted companies, which should not be allowed to decide on regulation.
While the center can not use the feared section 7, it wants the board to play a more dominant role because it considers that the central bank brass does not respond to the needs of the economy and does not want to engage in discussions with stakeholders or even senior officials.
If the center decides to issue directions to the central bank, there is no room for any academic discussion and the RBI would have to implement New Delhi’s wishes without compromising the decision’s niche or assessing the consequences.
A veteran central bank said that the unused section so far should not be invoked by the government. “It has not been used during war, famine or any economic crisis.” There are no reasons for using it now, he says. “Many people regard this as a context of personalities. Sources said that issues such as a new capital adequacy framework can not be resolved in a two-hour meeting, but must be considered by an expert panel that can go into previous wisdom about the subject and recommend changes.