A Temporary Truce

The finance ministry and the RBI might have stepped back from the brink, but simmering tensions between the two over autonomy could boil over again.

- Ashish Gupta

WILL HE? WON’T HE? It’s the question many in India’s business world were asking last month amid swirling rumours that Reserve Bank of India (RBI) governor Urjit Patel was going to quit because of a spat with the government. Many politicians, economists, and other experts even went so far as to dub a key RBI board meeting on November 19 a “day of reckoning” for the RBI, the government, and the economy. Despite the acrimonious run-up, there were no fireworks or resignation threats during the central bank’s nearly nine-hour board meeting. The much-dreaded but never-used Section 7 of the Reserve Bank of India Act, 1934—which allows the government to dictate policy issues to the central bank—was not invoked. Despite talk of demands to hand over the RBI’s surplus reserves to the government, there were no raids on its coffers or any concrete proposals to relax lending norms for state-owned banks under the prompt corrective action (PCA) framework. No separate liquidity tap was opened for nonbanking finance companies (NBFCs) or micro, small, and medium enterprises (MSMEs).

The RBI clung to its position, but what the meeting did achieve was an agreement to relook at some of the contentious issues. They agreed that the governor would consider a scheme to restructure the stressed assets of MSMEs with loans up to 25 crore; set up a joint committee to determine the appropriate capital requirements for the RBI and transfer the “surplus” to the government, and postpone the capital buffer requirements of banks by a year.