S Gurumurthy most vocal at RBI board meeting which started on a tense note but eased as day progressed

The full board meeting of the Reserve Bank of India started on a tense note in the morning but eased out as the day progressed. Except for a board member's direct attack on deputy governor Viral Acharya for his controversial statement that likened the government's stance as a T20 match while RBI's was like a test match, the discussion rarely heated up. In fact, Acharya's own objection to the setting up the panel for Economic Capital Framework to examine RBI's reserves, may have been a rare discordant note at the meeting.

Instead, thanks to Urjit Patel's conciliatory moves right through the day, the meeting was largely conducted in a non-hostile environment. "He acted more like a chairman than as a CEO," says a board member, explaining how Patel kept his cool and took charge of the situation to ease the tension and led the discussions.

The meeting, however, could take up only four of the dozen and a half items that were on the agenda. Two of the most critical issues that could not be taken up in detail and had to be deferred until the next board meeting on December 14 were: systemic liquidity and governance of RBI. The central bank, however, did get cracking on easing liquidity right after the meeting ended by announcing a Rs 8000 crore open market operations plan to buy government securities to ease liquidity in the system. It may be small change as compared to an estimated Rs 90,000-1,00,000 crore shortfall, but it was clearly symbolic of how much RBI was willing to bend to the Centre's demands.

And although every board member - including N Chandrasekaran, Bharat Doshi and Dilip Shanghvi - made his point during the discussion, the most vocal board member was RBI's part-time director S Gurumurthy who managed to get the board to approve restructuring of non-performing SME loans up to Rs 25 crore (Gurumurthy had asked for Rs 40 crore threshold). At one point, though, director Manish Sabharwal picked on Acharya for discussing in public what should have been discussed on the board. "Are you trying to be right, or successful," he asked, referring to the intent behind Acharya's statements at the AD Shroff Memorial lecture in Mumbai where he attacked the government. "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 had said.

"This led to hardening of stand on both sides," says an RBI director who attended the meeting. The situation could only be eased after some hectic back channel discussions.

After the marathon nine-and-a-half-hour meeting, the RBI board finally agreed to discuss easing the prompt corrective action against the 11 banks at the Board for Financial Supervision (BFS). Another panel of experts will be set up to examine the possibility of transferring RBI's reserves under the Economic Capital Framework committee. Besides, the RBI agreed with Gurumurthy's suggestion to allow restructuring of SME NPAs up to Rs 25 crore while banks got an additional one-year window to recapitalise their books.

"The idea was to start discussion on the areas of concern for the government. That objective has been achieved," says an RBI director. The world, though, will see it as nothing short of a surrender by the country's central bank.

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