The tussle between the Finance Ministry and the banking regulator came under public glare when for the first time, RBI Deputy Governor Viral Acharya said that government doesn't respect the central bank's autonomy and said government's intervention in the operational mandates of RBI negates its functional autonomy.
It was also agreed that the membership and terms of reference of the panel will be jointly determined by the government and the Reserve Bank of India.
"Based on an assessment of prevailing liquidity conditions and also of the durable liquidity needs going forward, the Reserve Bank has made a decision to conduct purchase of government securities under Open Market Operations for an aggregate amount of Rs 80 billion on November 22, 2018 through multi-security auction using the multiple price method", the RBI said in a statement on Monday. With regard to banks under Prompt Corrective Action (PCA), it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of the RBI.
This rigid stance appears to have been avoided, with the RBI now setting up a new committee to examine the economic capital framework (ECF) of the central bank.
The government has also geared up for a resolution in the board meeting through a voting process in case both sides didn't agree on key issues. The government believes that a direct outcome of the board meeting is that while the position of the RBI governor retains its primacy, the role of the board of directors has also gained importance. The reduction in capital adequacy ratio by 1% would release the central bank's capital worth Rs 55,000 crore for lending. Government sources told IANS that the RBI said that inflation was under control, and that it had taken no measure to tighten liquidity in the system.
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The government and independent board members like S Gurumurthy have been pressing the central bank to provide more liquidity to non-banking finance companies (NBFCs), ease lending rules to small businesses, relax norms for weak banks and part with more of RBI's surplus reserves to boost the economy.
Over the last few months, reports suggested that Gurumurthy wanted the RBI to ease bad loan recognition norms for SMBs in addition to making things easier on the liquidity front.
In the run-up to the board meeting, former Finance Minister P Chidambaram said Patel should step down if the board were to issue any direction to it on parting of capital reserves or relaxation of norms. At present, 11 out of 21 public sector banks are under the PCA framework. The highest payout was in 2015-16, when 83% of the RBI's income was transferred to the Centre as surplus. The government had criticised the RBI for publicly talking about the rift. It did not budge from its position of reducing the ratio from 9% to 8% as demanded by the government.
However, it has 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". This extension will allow flexibility to banks, which can have more money to lend.