Temporary truce

| Updated on November 21, 2018 Published on November 20, 2018

The Centre has not yielded much on its demands in this patch-up with RBI

It is a welcome denouement to the public acrimony between the RBI and the Centre, that both have stepped back from the point of no return and managed to strike a compromise. The use of Section 7 by the Centre to ‘direct’ the RBI to do its bidding, or the Governor’s resignation in a huff, would have both sent out the worst kind of signals to the financial markets, foreign investors and rating agencies. But the outcome of the latest Board meeting suggests that the Centre has not ceded much ground on its demands to win this temporary truce. With critical issues lobbed to committees, the can has simply been kicked down the road.

There are three issues on which the RBI seems to have partly or fully acceded to the Centre’s demands. One, it has agreed to a scheme for restructuring of stressed standard loans for MSME borrowers, despite taking a principled stand against such schemes in its February circular. Two, by deferring its March 2019 deadline for banks to meet its capital buffer norms, it has given the Centre some breathing space on the recapitalisation requirements for PSBs. Three, it has agreed to a review of its Prompt Corrective Action framework by the Board for Financial Supervision. True, on the contentious issue of transfer of RBI’s ‘excess’ reserves to the Centre, an immediate payout has been side-stepped. But with a jointly-appointed committee to decide on this, it could well be required to oblige in future. 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 its developed market counterparts which stick to monetary policy making. 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, except for some gaps in its supervision of public sector banks (where the Centre is equally culpable as the owner), the RBI has fulfilled its many roles creditably over the years — be it maintaining financial stability amid the Lehman crisis, sustaining tight monetary policy in defiance of global fads, maintaining confidence in the banking system or building up timely forex buffers.

Therefore, there is not much that is broken with India’s central bank that the government should be attempting to fix. Given that the institutional frameworks in India are quite weak compared to developed markets, it is critical that the central bank be granted the autonomy required to frame tight rules that keep market participants in check. Any attempt by the government to redefine RBI’s role should only be through a cordial consultative process, like the one that led to the Monetary Policy Agreement. Of course, as a constitutional body, the RBI also owes it to the public at large to refrain from ivory tower policy-making, engage with its constituents and justify its actions without crying wolf, when called to account by its Board.

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Published on November 20, 2018
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