Home >Politics >Policy >India’s liquidity crisis set to rock RBI board meeting

New Delhi: The Reserve Bank of India’s (RBI’s) board meeting on 19 November is expected to be a stormy affair in the backdrop of the ongoing tussle between the government and the central bank, people aware of the development said, adding that some members are likely to raise issues concerning capital framework, management of surplus and liquidity measures for MSMEs.

Tensions between RBI and the government have recently escalated, with the finance ministry initiating discussion under the never-used-before Section 7 of the Reserve Bank of India Act, 1934, which empowers the government to issue directions to the RBI governor.

RBI deputy governor Viral Acharya had in a speech last month talked about the independence of the central bank, arguing that any compromise could be “potentially catastrophic" for the economy.

According to people aware of the matter, theRBI board meetings are pre-decided, and the agenda is also circulated much in advance. However, board members can raise off-agenda items in the meeting. The people said the government-nominated directors and a few independent directors could raise the issue of interim dividend along with the capital framework of RBI.

However, any change in the central bank’s economic capital framework can be carried out only after making amendments to the RBI Act.

Other issues which could be raised include alignment of capital adequacy norms with those in advanced countries and some relaxation in the prompt corrective action (PCA) framework, the people said, adding more measures to enhance lending to MSMEs and NBFCs may also be discussed.

RBI is following conservative capital adequacy norms which are stricter than those in advanced economies, leading to banks keeping more risk capital reserve against loans.

The government is of the view that if RBI aligns it with the global average, it would free up bank capital which can be used for increased lending to productive sectors, the people said.

Earlier this month, RBI deputy governor N.S. Vishwanathan dismissed calls for lowering capital adequacy norms for the lenders and matching them with global levels.

The capital requirements are high for domestic lenders because of higher defaults/bad loans, Vishwanathan explained, and warned that lowering capital norms merely for aligning them with global standards will create “make believe" strong banks.

With regard to capital framework, the government had on Friday said that it was discussing an “appropriate" size of capital reserves that the central bank must maintain as it denied seeking a massive capital transfer from the central bank.

RBI has ₹9.59 trillion in reserves and the government reportedly wants the central bank to part with a third of that amount.

Economic affairs secretary Subhash Chandra Garg had said that the government was not in any dire needs of funds and that there was no proposal to ask RBI to transfer 3.6 trillion. The government, he said, is on track to meet the fiscal deficit target of 3.3% of GDP for the financial year 2018-19.

“There is no proposal to ask RBI to transfer 3.6 or 1 lakh crore, as speculated," he had tweeted.

“Government’s FD (fiscal deficit) in FY2013-14 was 5.1%. From 2014-15 onwards, government has succeeded in bringing it down substantially. We will end the FY2018-19 with FD of 3.3%. Government has actually foregone 70,000 crore of budgeted market borrowing this year." Garg further said, adding that the only proposal “under discussion is to fix an appropriate economic capital framework of RBI".

According to experts, the “economic capital framework" includes transfer of surplus reserves to the exchequer.

Former chief economic adviser Arvind Subramanian had in the Economic Survey 2016-17 said RBI was already exceptionally highly capitalized and nearly 4 trillion of its capital transfer to the government can be used for recapitalizing the banks and/or recapitalizing a public sector asset rehabilitation agency. However, this proposal never saw the light of the day.

On Sunday, former union finance minister P. Chidambaram asked the Centre what was its “tearing hurry" to “fix" the capital framework of RBI when the ruling dispensation had just four months to complete its term.

“The NDA government has competed 4 years and 6 months of its term. It has effectively 4 months left. What is the tearing hurry to ‘fix’ the capital framework of RBI?" he tweeted.

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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