The Reserve Bank of India board meeting on November 19 may decide to set up a high-level committee to decide on its capital framework, among the key reasons for the conflict between the regulator and the Centre, said several people familiar with the matter, downplaying expectations of a showdown. The possibility of the board giving any direction with regard to the actual transfer of RBI reserves to the government looks remote as the RBI Act does not permit this, they said.
“The board can lay down rules but cannot decide on a case-to-case basis,” said former financial services secretary DK Mittal, adding that the rules regarding the quantum of reserves to be held had been decided by the board. “The board has to take a balanced stand now. Both the government and RBI should behave responsibly.” Mittal was a member of the board by virtue of his position.
The reserves are meant for unforeseen contingencies, including depreciation in the value of securities, risks arising from exchange rate operations and other systemic challenges. The RBI did not respond to queries. “The issue has generated more heat than light,” said Partha Ray, professor at the Indian Institute of Management-Kolkata. “I don’t expect a sensational outcome from the meeting. Garg’s latest tweet perhaps showcases a realisation that all these confrontations are going to be costly on the country.”
Economic affairs secretary Subhash Chandra Garg last week rejected speculation that the Centre wants to tap the RBI’s reserves and tweeted that the “government’s fiscal math is completely on track,” adding, “only proposal under discussion is to fix appropriate economic capital framework of RBI.” A former bureaucrat said there was a need to lower the temperature to head off any dramatic developments. “The government has to backtrack on its demand. Otherwise, it may lead to a situation where governor Urjit Patel steps down,” he said. The board can make regulations consistent with the RBI Act, according to which the central bank was established “to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”
Matters expected to come up for discussion include the further injection of liquidity, easier rules for banks under the prompt corrective action framework and the proposal for an independent payments regulator. “Other issues related to general banking regulations have also been listed on the meeting agenda but these are unlikely to get any prominence,” said one of those cited above.
RBI may Set up Committee on Capital Framework
The board has powers of general superintendence and direction under the Act. Former governor Raghuram Rajan said recently that it’s not an “operational board” and isn’t led by professional supervisors or central bankers. “These are all people from different walks in life whose main role is to play the wise people to advise, to counsel,” he said in an interview to ET Now. Those on the board include the governor, four deputy governors and one member each from the RBI’s four regional boards. Garg and financial services secretary Rajiv Kumar are ex officio members. In August, the government nominated S Gurumurthy and businessman Satish Kashinath Marathe to the board.
Other members are Tata Sons chairman N Chandrasekaran; former M&M finance head BN Doshi; former Gujarat chief secretary Sudhir Mankad; former chairman of the Commission for Agricultural Costs & Prices Ashok Gulati; recruitment consultancy Teamlease chairman Manish Sabharwal, Sun Pharma MD Dilip S Shanghvi, former bureaucrats PK Mohanty and Revathy Iyer, and Research and Information System for Developing Countries director general Sachin Chaturvedi.
The Economic Times, 12th November 2018
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