The RBI concedes a vital principle (RBI versus the Government)

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The RBI concedes a vital principle (RBI versus the Government)

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• The wording of the press note: The post-Board meeting press note by RBI referred to the “Board” throughout. This is something new, as till now, all policy decisions were referred to as “taken by the Management”. That was autonomy.
• A big shift in RBI’s working: The government insisted that policy decisions must be taken by the Board, not just the management. This may become a change for the future – perhaps a positive one.
• What is the exact relationship? The RBI Board and the RBI Management enjoy a not-so-clear relation. The RBI Act vests powers in the Board, and in the Governor. If the two do not concur, then what? The Act isn’t clear.
• Advisory or more : Some say let RBI Board be an advisory one, like in corporates. But there too, if the situation demands, the corporate Boards step in to take policy decisions alongwith the management.
• Corporate Governance: That the RBI board should consider all policy decisions is part of governance.
• Raiding the Reserves: Govt. says that RBI is holding more reserves than needed, as seen elsewhere in the world. So there are suspicions that to plug its fiscal deficit, the government can “raid the RBI reserves”. Is that correct?

1. Reserves are in two categories –
1. Revaluation Reserves : depending on change in value of Rupee and Gold reserves held by RBI
2. Contingent Reserves :  plough back of annual surplus earned by RBI (balance given to govt. as dividend)
2. Contingent Reserves are for “risks” related to RBI’s balance sheet.  So maybe do not touch these.
3. Revaluation Reserves are an accounting entry, so some can be extinguished on liability side and extinguish equal value of govt. securities on the asset side. That will lower the debt stock of the government. It can then raise more debt for future spendings (PSB recapitalisation – for example).
4. The ECF Committee is to take this call now.

• Flow of bank credit: MSME credit crunch is a concern. Now banks are subjected to Capital Adequacy requirements, where they are asked to hold some capital against each rupee of loan made. The Basel norms (by BIS) has CA norms that’s 1% point lower than RBI’s CA norms. The govt. wants RBI to relax too, but it refused. It delayed by another year (by March 2020) giving the govt. and banks some room.
• PCA framework and NBFC liquidity: The first will be evaluated by a Committee, and the second finds no mention.
• Overall summary: It is good that RBI management has been made accountable by the govt., in bringing the Board into the scene.
• Summary - The government has done well to exert pressure on the RBI to ensure that decisions by management fiat become a thing of the past, and the Board is in picture from here on.
  

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