The recent headline grabbing confrontation between the government and the RBI is far more intense and, unfortunately, much more public. Ever since the October board meeting of the central bank, and the speech thereafter by deputy governor Viral Acharya warning about the effects of undermining the RBI’s regulatory autonomy, the confrontation between the government and the banking regulator on a host of issues has been escalating, with talk of whether the government would use its powers under Section 7 of the RBI Act to give directions to the central bank and ensure it had its way. Ahead of the RBI board meeting of November 19, an independent member of the RBI board had, however, sought to underplay the tensions and told me that Section 7 would not be invoked and governor Urjit Patel was not going to resign since things would not escalate further.

The RBI statement, issued after the marathon board meeting of November 19, seemed to indicate that there was a cooling down of tempers in the boardroom. Some key decisions were taken at that meeting. The RBI and the Centre would jointly set up a panel to decide on the terms of how much surplus the central bank would transfer to the government. The RBI board, the statement said, had also “advised” that the banking regulator should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to ₹25 crore, “subject to such conditions as are necessary for ensuring financial stability”.

The board also decided to retain banks’ capital requirement at 9%, but agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020. With regard to banks under Preventive Corrective Action (PCA), it was decided that the matter would be examined by the Board for Financial Supervision (BFS) of the RBI.

While the broad interpretation of the RBI statement and the outcome of the board meeting is that there has been a de-escalation in hostilities between the two sides and key issues like systemic liquidity, tough norms for banks and the level of reserves to be handed over by the RBI to the government are now being discussed, there is little doubt that something has changed fundamentally as far as government-RBI relations are concerned.

The government is no longer averse to getting its agenda discussed through the RBI board and, if necessary, seeking to push it through more aggressively than other governments may have done. The move to have a joint panel to decide the surplus transfer issue is one such example. Second, and equally important, is the RBI board’s advice on credit for MSMEs. This is bound to be viewed by RBI watchers as a significant shift to making the country’s central bank board more involved in decision-making, rather than leaving it to the governor and the RBI top brass.

Yes, the November 19 board meeting is a positive development in that hostilities have eased. Section 7 is not a discussion point, at least for now. But the coming days will show whether the two sides can really work together or whether this was a temporary truce to assuage the financial markets which were being shocked by the daily headlines. One thing, however, is certain: no matter what the RBI board members and bureaucrats say, there has been a fundamental shift in government-RBI relations. The jury will be out on whether that’s a good thing.

Yaga Venugopal Reddy

A fundamental shift in govt-RBI relations