Urjit Patel, Viral Acharya survive RBI board meeting; agree to many of Centre's demands

RBI Governor Urjit Patel and Deputy Governor Viral Acharya both survived what turned out to be a not so stormy full board meeting at RBI headquarters today, after all. The marathon meeting lasted over nine and a half hours but, barring a heated discussion over Acharya's comments, concluded amicably. The RBI backed-off from its confrontationist stand and agreed to initiate discussions on nearly all the issues that the Centre had raised with the country's central bank.

Right after the board meeting, the RBI got cracking on the decisions by announcing Rs 8,000 crore worth of open market operations to buy government securities from the market to ease liquidity.

Back channels have been at work in the past 7-10 days in the RBI vs Centre faceoff. Both sides had the better sense to activate them to rebuild this fractured relationship where discussions had almost come to a naught.

The first hint of conciliation came when the PMO accorded the RBI Governor an opportunity to discuss contentious issues face-to-face. You don't get an audience with the PM when you are sparring. Imagine the domestic and international ramifications of an RBI Governor putting in his papers right after a meeting with the Prime Minister! The basic contours of an agreement, the give-and-take would have been in place before any such meeting.

And they were, indeed, as RBI disclosed after the board meeting: "The Reserve Bank of India's (RBI) Central Board...discussed the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, bank health under Prompt Corrective Action (PCA) framework and the Economic Capital Framework (ECF) of RBI."

Sources says RBI Governor Patel personally took lead in the discussions at the meeting. The Centre was able to press a debate on four of the 20 items on the agenda, including the most contentious issues of easing systemic liquidity, easing prompt corrective action against banks whose performance has improved, transfer of RBI's reserves to the Centre and restructuring non-performing SME loans up to Rs 25 crore (a key demand of S Gurumurthy, who wanted a Rs 40 crore limit).

The Central bank has Rs 9.6 lakh crore of reserves in the form of contingency fund and forex and gold reserves and securities. These amount of nearly 28 pc of its total assets. Centre believes reserves amounting to 15-16 pc of total assets (the global average) are enough for RBI. The board decided to set up a committee to discuss transferring RBI's reserves to the Centre.

On the issue of liquidity in the system, while the RBI believes that there is enough liquidity, the government believes there's a shortage of over 1-lakh crore worth of liquidity. The State Bank of India in its latest report had also said there is a liquidity shortage of about Rs 90,000 crore in the system. RBI has agreed to ease liquidity. The Rs 8000 crore OMO is more symbolic action in this regard and more needs to be done.

RBI will also discuss relaxing the PCA framework for the 11 banks under restrictions that prevent them from lending. This hit the MSMEs and NBFCs hard as it has created a ripple effect of funds crunch among small borrowers, including housing finance companies who borrow from these banks. The banks put under the PCA framework include Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra.

The Centre and the RBI being on the same page is good news for the financial markets. It eliminates uncertainty among domestic and financial investors; sends a positive signal to global markets and signals to the stock markets that things may be getting back to normal, after all. The question is: for how long?