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Finance Minister Arun Jaitley and RBI Governor Urjit Patel. It is time for the government and the central bank to bury the hatchet so that the Indian economy can surely move on the path of growth. Photo: HT
Mumbai: Monday's RBI board meeting is crucial and could change the course of relations between the government and the Reserve Bank of India. The bitterness between the Ministry of Finance and the Indian central bank reached a new high, with both sides deadlocked. Board members belonging to various sectors of the industry are torn between these two camps. The stake is an economy that finally seems on the road to recovery, but also faces several headwinds. Here are five issues likely to dominate the Monday RBI board meeting and their implications for the Indian economy:
(1) Raid on institutional credibility
The government is not limited to regulation, but also its balance sheet. The RBI as an institution is seen as endowed with the intellectual capital to determine the strength of its own balance sheet. Therefore, the government should leave the judgment to the technocrats of the RBI. Global investors prefer political stability, but they attach more importance to the credibility of institutions. Respect for the institutional credibility of the RBI would appease global investors who would soon be faced with the uncertainty of national elections. The exit of dollars could worsen if the central bank was described as being weakening.
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(2) choking credit or avoid the crisis
The government accuses the central bank of stifling the banking system by unnecessary regulation. Some board members seem to share this view. Relaxing Basel's capital standards could save the government time, but it would not help reduce capital injections. Public sector banks would need a colossal capital injection, whether their capital adequacy ratio is 8% or 9%, simply because the provisioning of bad debts will remain high.
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(3) Build bridges, not burn them
Requiring the government that RBI supports non-bank lenders is not unreasonable. Non-bank lenders have been a critical source of finance for small businesses as last mile connectivity. In the aftermath of fiscal reforms and demonetization, small businesses have suffered and denying credit to them because of exogenous factors is unfair. The RBI also understands that non-bank lenders and banks are different and therefore the regulations must be different. Giving leeway to non-banks would go a long way towards improving the flow of funds to the Indian economy without compromising on prudence.
Enter the politician
The main concern of central bank observers is the possibility that political motives may infiltrate the operation of the RBI. Indeed, it is known that some board members have specific political affiliations. The government and the RBI must ensure that political constraints – unless they are accompanied by a rational economic logic – do not encroach on the functioning of the central bank.
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Good accountability, improved credibility
At the global level, the conduct of central banks has been the subject of close scrutiny after the global financial crisis. The need for central banks to be accountable is recognized and the RBI is not above that. To be fair, the central bank is accountable to the government and even to Parliament. That said, he should not hesitate to explain why he is doing what he is doing in front of the members of his board of directors. RBI would only strengthen its credibility in front of them.
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If media reports are an indication, the government and the RBI are aware of the disastrous consequences of a stalemate between them. It is time that they bury the hatchet so that the economy can go on the path of growth.
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