Temporary truce called RBI & FM issues on backburner

TN Ashok

Give respect and Take respect seemed to be dictum that ruled the latest meeting between the RBI Governor Urjit Patel and the Finance Minister Arun Jaitley in the financial capital. The latest, 19th to be precise for the federal bank’s board meeting, seemed to pave the way for a better atmosphere for the latest endless coffee round talks between the governor and the FM and led to some kind of a temporary truce only.

The tensions between the two apex financial bodies of the government seemed defused with both agreeing to settle for a middle ground at the end of a nine hour long board meeting. Dipping into RBI’s financial reserves has been the most contentious issue between the finance ministry and the federal bank , with the former wanting some portion to reduce the fiscal deficit without taxation, and RBI unwilling to allow any one touch its cache of monetary reserves kept as a rain cheque.

The RBI conceded to constitute an expert committee on the Economic Capital Framework (ECF), but its mandate is restricted to future earnings only and not the existing reserves, those who were privy to the discussions in the board meeting and not willing to be identified claimed.

“The board decided to constitute an expert committee to examine the ECF, the membership and terms of reference of which will be jointly determined by the Indian government and the RBI, the Central Bank said in a press statement issued soon after the meeting.

Detailed presentations dominated the meeting with the focus being on Economic Capital as also other issues like the Prompt Corrective Acton (PCA) framework. Under PCA RBI usually either tightens or loosens the bank rates to control inflation and when the rupee slides pumps in dollars from its reserves into the commercial banks to stabilise the Indian currency which has been on a downward slide in the last two months and earned the nickname “worst performing currency in the world”. PCA also relates to the Non-Performing Assets of public sector banks which are mounting. There are 21 banks with mounting NPAs.

Again,  on the PCA front, the Board for Financial Supervision (BFS) of the RBI will time to time review the norms and make an intervention if critical parameters such as NPAs ration could be relaxes so that banks get breathing time to come out of the PCA. Some 11 PSU banks out of 21 are on the PCA. The BFS is constituted by the RBI governor himself, four deputy governors, and a few other board members which may also include independent members. Another major decision that followed the truce between the RBI and FM that replaced the face-off between the two sometime back, was to dispense relief to the micro, small and medium enterprises – the sectors hit by the double whammy of demonetisation of November 2016, and the not so effective implementation of the Goods and Services Tax (GST).

Demonetisation wiped out the cash from these institutions and they were not adequately prepared for digitisation and GST with slabs constantly changing as per demands from the industry left a trail of woe and destruction. An RBI statement released to the media said that the federal bank’s board advised that the RBI consider restructuring of stressed standard assets (SSA) of MSME borrowers with aggregate credit facilities of Rs 250 million ( Rs 25 crore) subject condition that are necessary to usher in financial stability.

Capital Adequacy Ratio (CAR) was retained at 9 % for the commercial banks after a prolonged debate on whether it should be reduced to 8%.Two important issued that seemed to have been skirted by the board were – liquidity for non-banking financial companies (NBFCs) where the common man has been hit by the lucre of higher deposit rates than banks, broad governing issues of the RBI.

The next coffee table discussion between the RBI and FM is slated for December 14, when parliament would be in session. One can expect some fireworks in both houses of parliament before the meeting as the opposition would come fully charged to stall proceedings over the RBI FM spat.

The main tensions between the RBI and FM began with reference to section 07 of the RBI act for consultations on critical issues. Section 07 seems to give unbridled powers to the finance ministry to issue directions to the RBI, the custodian of financial reserves and monetary policies and the caretaker of the Indian rupee in international banking circles and trade, which has been hotly contested by the RBI, with the deputy governor viral acharya, going viral on the issue in the media strongly backed by his boss Urjit Patel, the

To find a way forward from the lockdown between the RBI and FM, the government wanted: And what the RBI decided:

1)      Aligning capital norms of banks to Basel levels —- RBI said NO CHANGE to Basel levels :deadline was pushed by a year for the last tranche

2)      Relaxation of PCA framework on 11 PSU Banks
– RBI said this would be examined by a department of the banks and gave no commitment on the spot

3)      Easier credit for MSMEs – RBI said it would consider a debt recast for MSME borrowers with loans of upto Rs 25 crore

4)      Special liquidity window for NBFCs – RBI said it commits itself to set up a committee to examine the Economic Capital Framework of RBI

5)      Government wanted fixing issues of governance in RBI – a contentious point that seemed unresolved with no agreement


Issues that remained unresolved were: Special liquidity window for NBFCs. Right from the UPA regimes time NBFC s functioning has been a thorn in the eye of the RBI as some of the NBFCs lured people with higher interest rates than banks, sometimes as high as 20% against 6% to 7% for term deposits of banks, and fled overnight with the cache of loot. RBI is extremely wary of such fly by night operators and so is the finance ministry but the latter is trying to find a solution amicable to both – the collector and the depositor.


The foreign media such as the leading Bloomberg , owned by the once New York mayor, sees issues in a different international perspective.Bloomberg says The Reserve Bank of India largely has itself to blame for the government’s interference in its independence. Bloomberg Economics sees merit in political demands for a lower capital reserve framework for the central bank. A limited surplus transfer from the RBI to the government could bring an amicable end to the feud.


The British international News Agency Reuters, famous for its Reuter Monitory Service (RMS) which bringing in revenues worth billions of dollars on intelligence & analytical reports on international monetary economics and fiscal policies, said that all that the government was asking the RB to do was to hand over a part of its surplus reserves to put that to more productive use. The same sentiments were reflected in the reports by by Bloomberg. Economics affairs secretary S.C. Garg was expected to make a presentation in the board meeting to outline the concerns of the finance ministry and bring up the question about the transfer of surplus cash reserves held by the RBI,Reuters reported, citing sources. An RBI board member told Reuters that an expert panel may be set up to work out the appropriate level of contingency reserves for the RBI, effectively kicking that question down the road.


Media reports claim that the BJP ideologue Swaminathan Gurumurthy could be behind much of government thinking and advising finance ministry. He may be and still is the key to whether a compromise can be found or whether the already public spat turns even uglier in the future though some compromise had been reached at the board meeting.

Investment bankers had also their own take on the EBI FM controversy. For instance ,Saurabh Jain, assistant Vice-President-research at SMC Global Securities said “  The major thing to look out from the meeting was if they come out with any respite for non-banking financial companies’ liquidity situation. Also, one would look at how many banks can come out from the prompt corrective action as per government’s wishes and what RBI can do towards that, apart from the issue of surplus reserves held by the central bank.

Anders Faergemann, a fund manager in London at Pine Bridge Investments clamed “: Any moves by the Indian government to undermine RBI’s independence would make us think twice about re-entering the Indian bond market. Strong institutions are critical for any country and to attract foreign capital,  the central bank will have to remain independent.

“Foreigninvestors wanted some cues to emerge from the RBI board meeting on the extent to which the central bank is autonomous, but it will be good for bond markets in the short-term if the RBI gives in to the government’s demand formore liquidity, Reuters quoted a foreign bank source to say.

The main issues that figured on the agenda of the RBI board meeting and FM’s presence was: Expectations were high that at the crucial meeting to find a solution to the way out ,the RBI board members would have discussed  (1) capital adequacy rules in India in accordance with Basel III norms, (2) prompt corrective action framework for weak banks, (3) liquidity crisis faced by small and medium enterprises and NBFCs, and (4) transfer of surplus by the RBI to the government.

None of these expectations were belied. Give some and take some, that’s how RBI and FM reacted to each other’s suggestions. Besides, Bloomberg reported that the government had directed  that  Reserve Bank board draft regulations to enable setting up of panels to oversee functions including financial stability, monetary policy transmission and foreign exchange management. All critical factors that govern the Indian economy which got wants to correct before the 2019 election put the GDP growth on a steady line , control inflation , kick start manufacturing and create more employment to woo vote banks for a 2nd term. Question is whether the new government kicks in led by the Congress or the Old BJP led NDA continues, some of the contentious issues will still remain as it’s a fight between two institutions. The battle for supremacy between an autonomous institution with a government machinery.

T N Ashok is a Corporate Consultant, Resident Editor and Writer of Economic Affairs.

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