Though an all-out confrontation between the Reserve Bank of India and the NDA government has been averted for now following conciliatory signals emanating from the crucial board meeting of the central bank, the friction is far from over. The contentious issues are yet to be resolved to the satisfaction of both the sides. On transferring RBI’s surplus reserves to the government, the foremost among the flashpoints, the board skirted the issue of the existing surplus but decided to set up an expert committee, headed by an outsider, to determine the percentage of provisions that the central bank should apportion out of its future profits. This will indirectly mean that the key dispute will be left to the next government to tackle, with the general elections being less than six months away. While it may be alarmist to say that the present dispensation wants to ‘capture’ and ‘destroy’ the institution for its reserves using its ‘cronies’ in the board, the stand-off had indeed started when the government made discrete attempts to have a larger supervisory role, appointed an RSS functionary S Gurumurthy as a board member and made out a case for transferring ‘excess’ reserves to the tune of Rs 3.60 lakh crore. This led to a general perception that the Centre was trying to take greater control of the central bank, invoking the grounds like the need to infuse liquidity into the system and give a fillip to growth.
After a marathon nine-hour-long meeting of the RBI board, both sides could find a common ground on four out of the 12 contentious issues. The board’s resolution on setting up a committee to review RBI’s Economic Capital Framework is significant. It is also heartening that the board has reached a consensus on restructuring scheme for stressed micro, small, medium enterprises (MSMEs), relaxing Basel norms for banks, albeit marginally, and re-tasking RBI’s Board for Financial Supervision to determine the efficacy of Prompt Corrective Action (PCA) if the ailing public sector banks can achieve a turnaround. The argument that RBI’s estimated Rs 9.6 lakh crore reserves legitimately belong to the government has added to the existing tensions. As former Governor Raghuram Rajan aptly put it, the RBI is like a “seat belt” and without it, the government could get into a serious accident. While the government of the day is well within its rights to push for a more lenient approach in the interest of growth and availability of liquidity, the central bank has a responsibility for financial stability and, therefore, should have an authority to say no. At a time when financial markets are facing several challenges, both must work together in harmony to put the country on a higher growth path.