Aclosely watched meeting of the board of the Reserve Bank of India ended this evening with the central bank agreeing to increase liquidity in the open market. The central bank will pump in up to Rs 8,000 crore into the market by purchasing government bonds.
An increased cash flow was among the issues that had brought the Urjit Patel-led RBI and the Narendra Modi government at loggerheads.
During the meeting, the RBI board, which consists of RBI director Urjit Patel, his four deputies and 13 other members either from or appointed by the government, discussed all the contentious issues on which the central bank and the government had clashed.
In a press statement released after the meeting, the RBI said that some of those issues will be examined by pre-existing committees or panels.
A new committee, however, will be set up to examine the crucial issue of whether the RBI should
have over its surplus reserve money to the government.
The composition of that committee will be decided jointly by the government and the RBI.
The issue of easing lending restrictions imposed on state-run banks, on the other hand, will be examined by the Board for Financial Supervision (BFS).
Similarly, the RBI board also advised that the central bank “should consider a scheme for restructuring of stressed standard assets of MSME borrowers”.
So, the only contentious issue that seems to have reached complete resolution at the RBI board meeting today was that of increasing cash flow into the market.
The RBI announced that it would buy government bonds worth up to Rs 8,000 crore in order to increase liquidity.
RBI VS GOVT
The Reserve Bank of India board met today days after the central bank’s unease over government interference became public.
On October 27, RBI deputy governor Viral Acharya delivered an unusually strong statement warning against government interference in RBI’s affairs.
“Governments that do not respect central bank’s independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution,” Acharya said at an event in Mumbai.
Acharya’s comments were seen to have tactic understanding of his boss, Urjit Patel.
In days after Acharya’s comments, the issues that brought the government and the Urjit Patel-led RBI to loggerheads became public.
The issues ranged from the government wanting the RBI to ease some norms so that banks could easily lend money. The government also wanted the RBI to help in ensuring better credit flow to Micro, Small and Medium Enterprises (MSMES).
Another flashpoint was the Centre asking that the RBI transfer surplus reserves to the government.
On all these issues, Urjit Patel’s RBI was seen to be reluctant as far as giving in to the government requests was concerned.
The RBI vs government tensions were capped off by the latter invoking Section 7 of the RBI Act, something that was never done before in the history of independent India.
Section 7 of the RBI Act empowers the government to issue directions necessary to the RBI from time to time. The complete implications of the section being invoked remain unknown