5 things that will dominate the RBI board meeting tomorrow

Minister of Finance Arun Jaitley and RBI Governor Urjit Patel. It is time for the government and the central bank to bury the hatch so that the Indian economy can go safely on the way to growth. Photo: HT

Mumbai: The RBI Board meeting Monday is a crucial factor that can change the relationship between the government and India's Reserve Bank. The bitterness between the Ministry of Finance and India's central bank has reached a new high, with both camps on a standoff. Board members of various parts of the industry are torn between these two camps. At stake is an economy that seems to be heading for an extraction, but it is also facing several headwinds. Here are five things that are likely to dominate RBI's board meeting on Monday and their implications for the Indian economy:

(1[ads1]) Raid on institutional credibility

The government has not only come to the RBI regulations but also its ball ance sheet. RBI as an institution is perceived to have the intellectual capital to determine the strength in its own balance. Therefore, the government should pass judgment to the technologies of RBI. Global investors prefer political stability, but they value the institutional credibility more. Respecting the institutional credibility of RBI would reassure global investors who would soon face uncertainty about national elections. The end of the dollar may get worse if the central bank is portrayed as a weakening.

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(2) Choking Credit or Avoidance of Crisis

The government accuses the central bank to suffocate the banking system by unnecessary regulation. Some board members seem to share this view. Reducing the Basel norms on capital can buy the government, but it will hardly help to reduce capital inflows. Public banks will need huge capital investment, regardless of whether their minimum capital ratio is 8% or 9%, just because there is still high credit distribution.

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(3) Build bridges, do not burn them

The government's requirement that RBI provide support to non-bank lenders is not unreasonable. Non-bank lenders have been a critical source of funding for small businesses like a last mile connection. After tax reforms and demonetization, small businesses have suffered and denied them because of exogenous factors are unfair. 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 to improve the flow of funds to the Indian economy without compromising with caution.

Enter the politician

The main concern among central bank guards is the possibility of political motivations that enter into the function of RBI. In fact, some board members are known to have specific political affiliations. Great care should be taken by the government and the RBI that political coercion – unless accompanied by good economic logic – does not affect the central bank's function.

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Responsibility Good, Credibility Better

Globally, listings of central banks have been investigated after the global financial crisis. The need for central banks to be responsible is acknowledged and the RBI is not over this. To be fair, the central bank is responsible for the government and even the parliament. Having said that, it should not hesitate to explain why it does what it does in front of its board members. RBI would only strengthen its credibility in front of them.

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If media reports are any indication, the government and RBI are aware of the serious consequences of a standoff between them. It's about time they bury the hatch so the economy can go safely on the growth road.