Showdown averted, RBI agrees to ease liquidity at board meet

Mumbai: A nine-hour marathon meeting of the Reserve Bank of India's central board ended on a ‘cordial note’ as a mutual agreement was reached on several contentious issues, ending speculation about a major showdown between the government and the central bank. It also meant that governor Urjit Patel and deputy governor Viral Acharya — the latter had been criticised by the government for bringing the differences between the two sides to the public domain — survived and the bank sidestepped a confrontation.

According to a post-meeting release by the RBI, the board discussed the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, bank health under Prompt Corrective Action (PCA) framework and the Economic Capital Framework (ECF) of RBI.

The RBI board decided to set up a high-powered committee to examine issues related to surplus capital of Rs 9.69 lakh crore with the central bank and advised it to consider a scheme for restructuring stressed assets in the MSME sector.

The expert committee will examine the ECF, the membership and terms of reference of which will be jointly determined by the government and the RBI. It also advised that the RBI should consider a scheme for the restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore, subject to conditions of ensuring financial stability.

While deciding to retain the capital to risk-weighted assets ratio (CRAR), also called the capital adequacy ratio (CAR), at 9 per cent, the RBI board agreed to extend the transition period for implementing the last tranche of 0.625 percent under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020.

With regard to banks under PCA, it was decided the matter will be examined by the Board for Financial Supervision (BFS) of RBI. Governor Urjit Patel is believed to have said the bank should not send the wrong message by watering down rules.

Soon after the board meeting, the RBI announced Rs 8,000 crore worth of open market operations to buy government security from the market to ease liquidity. While it was speculated that a face-off with the government was on the cards, a series of closed door meetings — including one between the prime minister and Patel — ensured that such a situation was avoided.

RBI's next meeting will be held on December 14, according to various media reports. The next meeting is likely to focus on liquidity and governance issues.

The 18-member board meet was attended by Patel, four deputy governors, government nominees — Department of Economic Affairs secretary Subhash Chandra Garg and Financial Services secretary Rajiv Kumar, besides non-official directors, including S Gurumurthy and Satish Marathe. Other directors on the board include Tata Sons' N Chandrasekaran and Sun Pharma chief Dilip Shanghvi.

It was decided that the Board for Financial Supervision (BFS) of the RBI would examine the issues concerning the banks that are under the Prompt Corrective Action framework. “The Board decided to constitute an expert committee to examine the Economic Capital Framework, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI," the central bank said.

The Modi government has been putting pressure on RBI to release part of RBI reserves to meet budget goals. The government also wanted norms for some banks to be relaxed so that they can lend easily and keep the economy rolling ahead of state and Lok Sabha polls.

Meanwhile, the rupee advanced and bonds rallied on Monday before the RBI board meeting concluded, and amid optimism a common ground would be reached. The currency gained 0.4 per cent to 71.6575 against the dollar, while the benchmark 10-year bond yield fell 3 basis points to 7.79 per cent.