A crucial meeting of Reserve Bank of India that discussed some of the most divisive issues in its 80 years of existence reportedly concluded on Monday evening.
It was not immediately clear whether the RBI and the government have come to an agreement on the key issues that had caused bitterness on both sides.
Among the most contentious issues discussed were the government's demands for steps to ease liquidity in the financial sector and increase credit to small businesses.
The government sees a reduction in the capital ratio of banks and procedural changes to speed up loans to micro, medium and small enterprises (MSME), especially in remote parts of the country ahead of the general election due by mid-2019.
As the meeting that began in the morning wound its way, it was apparent that rumours on the exit of governor Urjit Patel faded away as he was reportedly active in the discussions in the 18-member board including non-official government nominees S Gurumurthy and Satish Marathe
The board has four deputy governors, two government nominees – department of economic affairs secretary SC Garg and financial services secretary Rajiv Kumar – apart from the non-official directors. Some of the members left the meeting before sundown as other continued the deliberations.
Atmosphere of cordiality
The preponderance of the government nominees on the board continues to raise speculation that the board would have yielded some ground on the key issues.
There were reports that the government and the RBI might decide to go ahead initially with the issues on which they concur. The atmosphere of cordiality at the meeting at least for now ruled out the government taking out its veto power using the never-used Section 7 of the RBI Act. There had been an allusion to the key section by the government side including Finance Minister Arun Jaitley during the run-up to this meeting.
The two parties were looking to reach an agreement on the relaxation of the Prompt Corrective Action (PCA) framework and easing of lending norms for the micro, small and medium enterprises (MSME) sector, a news agency report said.
About the special dispensation for MSMEs and non-banking financial companies (NBFCs) that have been facing liquidity issues, which is another contentious issue on the table, the two sides had made headway.
Critical role
The government has stuck to the stand that the MSME sector, which employs about 120 million people and plays a critical role in the economy, needs extra support after demonetisation and the Goods and Services Tax.
The board also likely discussed RBI's economic capital framework to determine if the level of reserves it holds is excessive or not. The government thinks the RBI has Rs 3.6 trillion as "excess capital" in its reserves and wants the central bank to transfer more money to it as part of the surplus. However, the RBI feels it needs to have a stronger balance sheet to deal with a possible crisis and external shocks.
