Excess Reserves and Liquidity Issues Reasonable at RBI Board Meeting

The November 19 RBI meeting should be a stormy affair in the context of the government's ongoing conflict with the central bank, sources said, adding that some members may raise issues regarding the capital framework, surplus management and liquidity. measures for MSMEs.

Tensions between the RBI and the government have recently intensified, with the Ministry of Finance having initiated a discussion under Article 7 of the RBI Act, never used before, which allows the government to issue instructions to the government. Governor of the RBI.

In a speech last month, RBI deputy governor Viral Acharya spoke of the central bank's independence, saying any compromise could be "potentially catastrophic" for the economy.

According to sources, council meetings are pre-decided and the agenda is also distributed well in advance. However, board members may raise off-agenda items at the meeting.

Sources said the government-appointed directors and some independent directors might raise the issue of interim dividend as well as RBI's capital framework.

However, any changes to the capital framework for economic capital can only be made after amendments to the 1934 RBI Act.

Alignment of standards on capital adequacy with those of advanced countries and some relaxation of the prompt corrective action framework could also be addressed, sources added, adding that other measures to strengthen lending to creditors, and MSME and NBFC could also be discussed.

The RBI follows conservative standards for capital adequacy, which are stricter than those applied in advanced economies, which leads banks to retain more venture capital reserves to take out loans.

The government is of the opinion that if the RBI lined up on the world average, it would release a bank capital that could be used to increase lending to the productive sectors, sources said.

Earlier this month, Deputy Governor of the Reserve Bank, N. Vishwanathan, rejected calls for lowering lenders' capital adequacy and matching standards. global levels.

Vishwanathan explained that the capital requirements are high for domestic lenders due to higher default / bad loan rates, pointing out that lowering capital standards simply to align them with the standards would create strong banks.

Regarding the capital framework, the government announced last Friday that it was discussing an "appropriate" size of capital reserves that the central bank must maintain as it denied having sought to obtain a massive capital transfer from the Reserve Bank.

The Reserve Bank of India (RBI) has a massive reserve of 9.59 million rupees in reserves and the government apparently has asked the central bank to separate one-third of that amount.

The Secretary of State for Economic Affairs, Subhash Chandra Garg, had stated that the government did not urgently need funds and that there was no proposal to ask the RBI to transfer an amount of 3.6 million rupees.

The government, he said, is on track to reach the target of 3.3 percent of GDP set for the fiscal deficit for the 2018-19 fiscal year.

"There is no proposal to ask the RBI to transfer 3.6 Rs or 1 lakh crore (Rs), as expected," he had tweeted. "The government's budget deficit for the 2013-2014 fiscal year was 5.1%, and from 2014-2015, the government managed to reduce it considerably." We will close the 2018-2019 fiscal year with a FD of 3.3% The government has in fact renounced (Rs) 70 000 crore of contract loans this year.

Garg added that the only proposal "under discussion is to set an appropriate economic capital framework for the RBI".

According to the experts, the "economic capital framework" includes the transfer of excess reserves to the balance.

In the 2016-17 Economic Survey, former chief economic advisor Arvind Subramanian said that the RBI was already extremely capitalized and that nearly 4 million crowns of its capital transfers to the government can be used for the recapitalization of banks and / or recapitalization of a public sector asset Rehabilitation Agency.

However, this proposal never came into being.

At the same time, former Union Finance Minister P Chidambaram on Sunday asked the Center what was his "hurry" to "fix" the RBI capital framework while the ruling dispensation did not have than four months to complete his term.

"The NDA government has been competing for 4 years and 6 months, so it's still 4 months, what is the quickest press to" fix "the capitalization framework of RBI?" he tweeted.