ANALYSIS | Govt draws first blood in RBI battle

It was a battle that lasted nine hours and when it ended, no one was carried out on a stretcher. But a closer look at what emerged from Monday’s marathon RBI board meeting suggests that the central bankers seem to have yielded plenty of ground to the government.

The government wanted the RBI to support small businesses, it wished to have a larger pie from RBI's capital reserves and it desired that the RBI Board does the decision making instead of the central bank, whose top brass were not much responsive.

On all three fronts, the government appears to have gained a great deal on the Board where it has two strong nominees and most of the independent members supporting its cause. Not only that, but it has also bought peace with the RBI till at least the next Board meeting on December 14 when liquidity and governance issues will come up for discussion once again.

“The market sensed that both parties – the government and RBI - were ready for a discussion and the ongoing rift had settled down for now,” says Gaurang Somaiya, Economist at Motilal Oswal Financial Services, adding the immediate consequence was an appreciation in the rupee.

Three things have emerged from the statement that RBI released after the Board meeting.

First, the government and the RBI will have its members on the committee that decides on the economic capital framework. Hence, the decision is no longer in RBI's hands. The government is eyeing the central bank's Rs 3.6 lakh crore surplus capital to fix its fiscal hole which may get deeper when it decides on doles ahead of the 2019 Lok Sabha polls.
The government's only chief economic adviser, who left mid-way, has given it enough handle to dip into RBI's reserves. Arvind Subramanian repeatedly argued that the RBI was sitting on too much capital, which, if transferred, could be used by the government for various purposes, including the resolution of bad loans. His estimates were that the RBI could return the government as much as Rs 4 lakh crore. He had suggested that in his 2016 and 2017 Economic Survey as well as this year. However, in 2016, it was dismissed by the then RBI Governor Raghuram Rajan.

Second, even on the matters of credit and liquidity, it is the Board that has advised the RBI. For instance, the issue of restructuring of loans to MSMEs, it is the Board and not the RBI which decided on what should be the capital adequacy ratio of banks. On PCA matters too, the Board of Financial Supervision will decide whether lending restrictions on 11 PSU banks should remain or some of them should come out of it. Are the decisions increasingly becoming Board-driven?

Third, the Board has left many things open-ended and vague. For example, the Board has constituted committees on contentious issues but has not given any timeline by which they should get back. On the issue of restructuring MSMEs' loans of up to Rs 25 crore, the big question is whether the government or the RBI has all the data on MSMEs in India?

Nikhil Gupta, chief economist at Motilal Oswal Securities says, it is too premature to come to a conclusion on who had an upper hand at the Board meeting but the positive thing for the market and investors is that the RBI Board has agreed to look into certain issues and there is a truce between the government and the central bank.

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