The Reserve Bank of India’s (RBI) press release after a marathon nine-hour board meeting indicates that the central bank has prevailed on most of the substantive points.
The RBI has kept its capital for now. A committee will be set up by the government and the central bank to decide on the economic capital framework.
The board, while deciding to retain the Capital to Risky Asset Ratio (CRAR) at 9 percent, agreed to extend the transition period for implementing the last tranche of 0.625 percent under the Capital Conservation Buffer (CCB), by one year (up to March 31, 2020), which the RBI may have done anyway. The important point is the minimum capital has not been brought down to 8 percent, as some government officials wanted.
The RBI-determined filters which decide whether a bank should be put into the Prompt-Corrective-Action framework or not remain unchanged. The government wanted the RBI to remove some of the filters.
Finally the board has “advised” the RBI to design a scheme of restructuring for MSME loans under Rs 25 crore. RBI still has the right to ensure that the restructuring framework isn’t an across the board forbearance.
That said, there are still signs in the press release that indicate that the RBI has lost some of its autonomy to the board.
The board has “decided” to retain the CRAR at 9 percent and postpone the 0.62 percent capital conservation buffer. However, it shouldn't be the board's “decision” to retain the capital. It is the technocrats at RBI who know it better. Also, isn't the board too conflicted to take this decision? N Chandrasekaran’s group, the Tata companies, Bharat Doshi’s group M&M and Dilip Sanghvi’s Sun Pharma are also borrowers from the banks. Can these men be allowed to decide the capital of these banks?
Having “decided” to retain the CRAR at 9 percent, the board, by implication, retains its right to change its decision in the future.
The board of financial supervision has happily been allowed to decide if the PCA framework needs to be tweaked. Only one hopes the board doesn’t decide to accept or reject the BFS’s changes, if any.
The capital of the RBI remains coveted. Is it likely to be grabbed by this government? Much will depend on who has the right to appoint the members of the economic capital committee which will go into the formula for determining the RBI's capital and also who the members will be. Given that there are exactly 100 days for the code of conduct to kick in before the elections, chances are that this government won’t be able to appropriate any excess reserves from the RBI, if the committee were to find the RBI over capitalised.
Simply put, the RBI's victory is merely a strategic postponement of curbs on its autonomy. The Ideological war has probably been won by the government in terms of its assertion that the board shall decide substantive matters.
If for argument’s sake a new government comes to power after the May elections, that’s no guarantee that the current board will be restrained from wresting control of the management of the RBI. Chances are the new government having tasted blood will only replace the current ideologues with its own camp followers.
Is there a danger that RBI, as we know it, is itself in a danger of fading? The jury is out.