Centre, RBI close to resolving differences ahead of board meeting: Report

The Centre and the Reserve Bank of India (RBI) are getting close to resolving some of their policy differences, said two sources familiar with the discussions. The sources told news agency Reuters that central bank’s Governor Urjit Patel’s resignation rumours are off the table for now as enough progress had been made to avoid bitterness at a board meeting of the RBI next Monday.

The truce may see the RBI ease up on some lending restrictions to help the government stimulate the economy, said the sources. One source told the news agency that the RBI could agree to tweak restrictions on lending to improve credit flows for smaller companies with a borrowing limit of Rs 34 lakh

It is unclear how much of a role Prime Minister Narendra Modi played in defusing the tension.

According to a recent report by news agency PTI, Patel met Modi on November in a bid to work out several controversial issues that came to light over the last couple of weeks.

Speculations have been rife that Patel met senior officials in the Prime Minister's Office (PMO), including Modi in New Delhi and discussed several ongoing factors ranging from the appropriate size of reserves that RBI must maintain to ease of lending norms to step up growth in an election year.

There are also reports that the RBI may create a special dispensation for lending to small and medium enterprises, but it was not immediately clear if an agreement has been worked out to ease liquidity situation for non-banking finance companies (NBFCs) and the RBI parting with its substantial part of its surplus.

The development came days ahead of the RBI's crucial board meeting on November 19 during which contentious issues are likely to be taken up for discussions. The factors which are going to be raised include the government's proposed changes to the RBI Act, 1934, alignment of capital adequacy norms with those in advanced countries and some relaxation in the Prompt Corrective Action framework.

The RBI and the government have been at loggerheads ever since the Finance Ministry initiated talks regarding the never-used-before Section 7 of the RBI Act, which empowers the government to issue directions to the RBI Governor.

RBI Deputy Governor Viral Acharya, however, in October pitched for the independence of the central bank, adding that any compromise could be "potentially catastrophic" for the economy.

Meanwhile, the Economic Affairs Ministry had last week rejected the reports of the Centre’s proposal to the RBI seeking transfer of Rs 3.6 lakh crore and said the only plan "under discussion is to fix appropriate economic capital framework of RBI".

Economic capital framework refers to the risk capital required by the central bank while taking into account different risks. The Reserve Bank of India (RBI) has a massive Rs 9.59 lakh crore reserves.

(With agency inputs)