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RBI CEDES LITTLE

RBI

The much-awaited meeting of the Reserve Bank board of directors, finally took place yesterday, minus the fireworks in the preceding weeks and the doomsday scenario that some had predicted. There were no resignations or conflicts traded to rile the markets. If the reports are true, the meeting was held in a cordial and business-like atmosphere, with no homilies or taunting tweets and both sides moving away from their extreme positions. The fact is that in the aftermath of the fiery speech of Viral Acharya on 26.10.18 and the sarcastic tweet of S C Garg thereafter, both sides realised that there would be no winners in this fracas and that a heated public debate suits neither. It was realised that washing dirty linen in public would only deplete the political capital of the ruling party and would erode the professional standing of the RBI top brass. Both had been at the receiving end of trenchant criticism and needed to reconsider each other’s views. It was an unnecessary clash of arrogance of power versus arrogance of expertise and both sides realised that if tempers were not cooled, it was neither in the interest of the nation, nor in their own. A signal of rapprochment and reconciliation was evident, when the RBI governor met the PM last week, in which a sense of statesmanship must have prevailed.

Unlike the earlier meeting of the RBI board held on 23.10.18, this one was a relatively timid affair. The outburst of Viral Acharya, the RBI DG in his speech on 26.10.18, seems to be a reaction to the meeting on 23.10.18, when the government nominees referred to the government’s ultimate powers to give directions to the RBI governor, under section 7 of the RBI Act. Yesterday’s meeting seems to have respected and restored the regulatory autonomy and integrity of the RBI.

The open conflict between the RBI and the government,has been ill timed. India’s macro economic fundamentals may look solid, but are yet precariously poised and the professional ie. the RBI needs to be left undisturbed to do its job dispassionately. The roots of the present conflict lie in the unresolved gigantic NPA crisis, which is restraining the growth of banks, as also the economy and now threatens to destabilise the NBFCs, India’s shadow banking industry. The NBFC woes have come out in the open, with the collapse of ILFS, with fears that the contagion would spread to the entire sector. So while the NPA crisis remains untamed, a potential new one in the NBFC sector has emerged on the horizon. The net result of this twin crisis is that lending to the MSME sector has been suffering and the sector, which is yet reeling under the after effects of a brutal demonetisation, is miles away from revival and recovery. With a huge election season on the cards, the wellbeing of the MSME sector, which is considered to be a loyal votebank of the BJP, has assumed top political priority for the government. That explains why the government has been pushing the RBI to lift the PCA restrictions on banks to resume their lending and to infuse liquidity into the NBFC/MSME sector. The RBI on the contrary refuses to lift the PCA curbs, as it is eager to nurse the PSBs to health and it thinks that there is enough liquidity in the NBFC system. The government which faces a growing fiscal deficit this year, has also been eyeing the contingency reserves of the RBI to the tune of Rs.3.60 lac crores, as a fund raising measure to bridge the gap. The RBI has refused to part with its reserves, for valid reasons, provoking the dispute into the public domain.

The RBI board meeting was a relatively tame affair, with both sides in a conciliatory/flexible mode. While the government nominees did nothing to disrespect the RBI’s autonomy, it is evident from the key decisions that little ground was truly ceded by the RBI. It has been agreed to set up an expert committee to examine the government’s demand for transfer of RBI reserves, to look into a scheme for restructuring of  stressed MSME accounts upto Rs.25 crores each, and that the RBI will examine the feasibility of lifting the PCA restrictions. No additional liquidity is being provided to MSMEs and NBFCs, with RBI of the opinion that there is adequate credit in these sectors.

The two parties have smoked the peace pipe, with the RBIs position remaining intact and it accepting to review/reconsider the government’s request. The threat of directions to the RBI governor under section 7 of the RBI Act has receded and so is the likelihood of public outburst by both. The markets are relieved.

 

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