New RBI gov puts off hard decisions

The committee in effect kicked the can down the road, putting off the problems to another day.

Update: 2018-12-16 01:31 GMT
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The much-awaited meeting of the RBI under its new governor Shaktikanta Das turned out to be uneventful considering the contentious background against which it was held. The two major issues awaiting a decision, namely relaxing the prompt corrective framework (PCF) for weak banks and the shape of the RBI’s economic capital framework (ECF) were left to be tackled at a later date with no time frame. In the case of relaxing the terms of the PCF of the 11 weak banks that were prevented from lending by the RBI, it was decided to leave it to the Board of Financial Supervision of the RBI. The government wanted these banks to be able to lend as the non-banking financial companies finance government’s infrastructure projects among other programmes and were facing a liquidity crunch.

The RBI board was unable to decide on the composition of the committee to look into the ECF of the RBI as there was no unanimity on the name of the person to head the committee. In short, the government is nowhere near getting a clear picture of how much reserves the RBI should hold and how much should be passed on to the government. The surplus is estimated at nearly '10 lakh crores. So far, it is advantage RBI.

Perhaps the government felt it would not be politically correct for the new governor to immediately dish out the RBI’s surplus funds to the government. It would negate its stand that it had no intention to dip into the RBI’s surplus reserves. The perception that the government wanted these funds to finance its projects and bankroll its 2019 general election expenses had created the unprecedented public friction between the government and the RBI. It finally led to the resignation of governor Urjit Patel last week.

The committee in effect kicked the can down the road, putting off the problems to another day. It restricted itself to discussing matters relating to liquidity, credit delivery and issues of currency management, financial literacy and the draft report on trends and the progress of banking in the country as it said in a statement released after the meeting.

The RBI’s autonomy has been under the scanner with the Narendra Modi government bypassing it on significant issues. For instance, the decision to demonetise the Rs 1,000 and Rs 500 currency notes representing 85 per cent of the currency in circulation, was taken by the government on the advice of a Pune-based organisation. The RBI was informed about the decision and went along with it. It is true that the RBI, like central banks around the world, cannot be completely independent of the government. But there is a Lakshman rekha that the government should not cross if the integrity and the unique status of the bank is to be maintained.

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