Government-RBI truce, but for how long?

An uneasy calm has descended on the Reserve Bank-Government battlefront. If an over eight-hour meeting without serious differences
surfacing is any consolation, it is cause for satisfaction.

But there is a lurking feeling that it may not necessarily be the precursor to a smooth sailing in future. Typically, some contentious issues have been swept under the carpet with a committee composed of reps from both sides to hammer them out. All eyes are on who would head the crucial panel and who would be its members. Some jockeying is already taking place.

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Yet, the fact that there was a spirit of give and take at the marathon meeting is an encouraging sign that needs to be built upon and
nurtured. The next test will be in mid-December when the Government representatives and RBI decision-makers meet again.

The key question is how to handle the central bank’s reserves. The RBI, sitting on several trillion rupees of revalued gold and foreign
exchange (thanks to the rupee’s sustained depreciation), thinks it is holding the right amount to deal with the stresses that might emerge
from a strained banking sector and a fragile current account balance. The government wants cash to manage its fiscal deficit better and to
use the money for current spending, especially with general elections being round the corner.

The RBI board decided to constitute the expert committee ostensibly to determine the level of reserves the central bank should hold vis-a-vis
its assets so that the excess can be transferred to the government. But the real crunch will come if there is disagreement on whittling
down the RBI’s reserves.

The committee will also look into the amount of liquidity that the central bank should infuse into the system and whether supervisory committees should be set up to oversee the RBI’s decision-making.

Anything that looks like an encroachment on RBI’s powers would be predictably resented by the central bank while the government would be
wary of any autonomy which to the RBI looks excessive.

That the markets want RBI-Government bonhomie was clear from the way in which they reacted after the seeming truce. The Indian rupee rose and bonds gained, an indication that the absence of a raid on the central bank’s balance sheet was welcomed. Whether that relief would
prove short-lived only time will tell.

No decision was apparently taken on issues related to easing credit flow to micro, small and medium enterprises (MSMEs) but the board
advised the RBI to consider a scheme for restructuring stressed standard assets of the borrowers of such enterprises with aggregate
credit facilities of up to ₹25 crore.

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The RBI was earlier unwilling to consider any loan recast scheme for small units on the plea that the banking sector was already reeling
under the impact of the huge pile-up of bad loans. But it now seems willing to come round. An existing committee of the RBI will now
review the Prompt Corrective Action (PCA) framework which imposes restrictions on lending on banks which have been hit by bad loans.

The RBI is expected to ease curbs and consequently boost lending for a few of the 11 public sector banks which have been placed under this framework.

The question of higher credit to MSMEs will need to be thrashed out headlong when the next meeting takes place and falling back on niceties without addressing the crux issues cannot be an option for long.

All in all, there was some defusing of tensions and it no longer seems that things would come to a head and the RBI chief Urjit Patel would
need to put in his papers. This is not good news for the Congress and other opposition parties that were relishing fishing in troubled waters to derive political gains before the elections to some assemblies and later to the Lok Sabha.

Yet, it is premature for any euphoria on the outcome of the marathon meeting. There still are some irons in the fire and the future would
be watched with deep interest.