What stand will the new RBI Governor take?

Our Bureau

Shaktikanta Das, the new Governor of the Reserve Bank of India, who has wide experience in the Finance Ministry, is expected to build a bridge over the chasm that has emerged between the central bank and the government over the last few months, say bankers and economists.

Trade and industry can also hope that Das will take into account their feedback while formulating policies.

The RBI, under the leadership of Urjit Patel, who quit as Governor on Monday nine months before his three-year term was to end, had strongly batted for the central bank’s autonomy.

The central bank was against transfer of excess reserves to the government (in view of its financial stability implications), relaxing prompt corrective action (PCA) norms (so that banks could step up lending), and opening a special liquidity window for non-banking finance companies, among others.

Financial sector

Under the previous regime, the RBI barely had any interface with the financial sector and industry when it came to policy formulation. But with Das at the helm, this is expected to change, say experts.

Differences of opinion between the RBI and the government have developed over a period of time. There are at least two to three issues – reserves, liquidity and relaxing the PCA norms – where the RBI could have accommodated the government’s proposals, said an economist. He elaborated: “On the reserves issue, the RBI is being too overcautious. If you even go by the value at risk measure and all that, the RBI doesn’t need this kind of reserves. Ideally, there could have been a constructive dialogue between the RBI and the government. “The RBI could have said, fine we can part with some part of the excess reserves, but we can’t release the whole thing because there could be a total undermining of monetary policy.”

So, a time-table for the next five years could have been drawn up as to how these reserves could be released.

Liquidity situation

On the liquidity situation, a senior banker said repo leads to only overnight liquidity injection. “Over and above repo, the RBI came up with so many bouts of OMO (open market operation) purchases of government securities.

“While banks are getting liquidity, the smaller NBFCs, which lend to MSMEs and housing, seem to be facing a crunch as banks are unwilling to lend to them/securitise their loan portfolios,” explained a banker.

PCA framework

The RBI has been too prudent in applying the PCA norms to weak banks.

“They could have been a bit practical. Without lending, turnaround can become a big issue for these banks,” said the banker quoted above.

At the next central board meeting scheduled for December 14, the RBI, under the leadership of Das, is expected to strike a conciliatory note on some of the aforementioned issues.

Central bank insiders say governance issues at the RBI will come up for discussion at the ensuing central board meeting, with presentations by both the government and the RBI.

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