RBI vs Govt: Ceasefire For Now but Threat of War Looms

“The matter is far from over. The war is far from over,” says Sanjay Pugalia on the tension between RBI & Modi govt.

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An unprecedented meeting of the Reserve Bank board went on for 9 hours on 19 November. A statement was released at the end of the meeting which hinted at a possible ceasefire between the government and the Reserve Bank of India.

A possible tussle has been put to rest. But it brought no relief because market indicators like the value of rupee, bonds and market indices indicated that not everything has been settled yet.

The declarations made by the RBI are that it will consider the measures to increase liquidity and restructure the Rs 25 crore loans issued to MSMEs.

A big announcement was made that a committee will be formed in near future that will decide on how and when can RBI’s surplus capital be transferred to the government in the future. The government doesn’t need the money for now but in the future when the need arises, this committee will be deciding a capital framework.

All these declarations have increased the public concern that all is still not well between the government and the RBI. Earlier, RBI board used to stay away from the headlines. But now, the law allows the board to act in an advisory capacity.

For now, the management role stays with the RBI Governor and his deputy. But it's important to take a look at who these members are.

No Banker or Monetary Policy Expert in Current RBI Board

It's very odd that there are no bankers in the board. Nor is there a monetary policy expert. The board consists of a few govt officials, a few businessmen and two new faces – Gurumurthy and Marathe – who have declared political allegiance. They are not technocrats and do not have the experience of framing monetary policy.

So, the composition of the board in itself is a cause of concern. Now if this board, instead of issuing guidelines, starts issuing directives to the RBI then it will ring alarm bells not just in India but across the world.

But why does it concern the world? Because India is a growing economy. It's the country that survived the Lehman crisis because of the work done by the then central banker.

Why is The Govt Trying to Control the RBI?

Now, the government is trying to rein in the autonomy of the RBI. Why do they want to rein in the autonomy? What does the government want?

All the governments are cash hungry because it's their responsibility to spend money. RBI's role is to maintain balance & stability. The government wanted money from the RBI so that they could manage the fiscal deficit problem. It also wants the RBI to loosen the liquidity. 70 percent of India's business takes place through public sector banks and right now, they are facing a liquidity crisis because a lot of the loans they issued turned into Non Performing Assets (NPAs).

The value of the NPAs is Rs 10 lakh crore which is unprecedented in Indian history. The banks have an NPA of 15.5 percent which is likely to increase to 16.5 percent by March 2019.

MSME Sector is BJP’s Core Vote Bank

In such a scenario, the government wanted the RBI to take measures that would increase liquidity in the market and enable public sector banks to issue more loans, especially to the MSME sector which is the core vote bank of the BJP. They have been complaining that GST and demonetisation have hurt them.

Just ahead of the elections, the government can now create a narrative, stating, “We took control of the RBI and forced them to release the capital which will be provided to the MSMEs.”

Right now, the credit offtake in MSME sector is at a historic low. In such a scenario, the government needs more money for the MSME sector. They want the corrective actions on the banks to be relaxed. These actions were taken so that the banks don't increase the NPAs by further providing bad loans.

Also, the govt wanted more capital dividend for itself.

Right now, this meeting has ended in a grey area. A final conclusion is still awaited which means the autonomy of RBI is still under threat. This is just a ceasefire.

A lot will also be revealed by the kind of people the government appoints to the committee. The next RBI board meeting is on 14 December. What remains to be seen is when this report will be demanded.

The elections are due in March 2019. If the report is demanded earlier, then technically speaking, the government can still demand the RBI releases capital. Hence, a heated debate is taking place across India on checks and balances in a democratic system.

If a precipitate action would have been taken then it would have come at a huge political cost for the government. Hence, such an action has been delayed for now.

The matter is far from over. The war is far from over.

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