India: Governance issues may hog limelight at RBI board meet

  • ‘Governance at Reserve Bank of India’ is slated to figure as a contentious agenda item in its board meeting on 19 Nov 18. Some of the RBI directors have insisted that key ‘governance aspects’ — such as the role of the board, its powers, and referring regulatory decisions to the board — should be discussed.
  • “The government and some of the external directors feel that RBI acts on behalf of the board, using powers delegated by the board… For decades there has been no discussion on governance at RBI,” a person familiar with the issue told ET.
  • “A discussion on governance, a significant issue, could not be taken up at the last board meeting. Also, the RBI balance sheet and use of reserves is likely to be another agenda item in the meeting,” said the person.
  • RBI had told the government that it would prefer a status quo on governance matters while sections in the board believe that the board should play an active role in line with the RBI Act and have the right to deliberate on issues pertaining to regulatory forbearance, accounting and regulatory changes that significantly influence balance sheets of banks.
  • According to a source, the advocates of this view think the formation of monetary policy committee had addressed one of the issues relating to governance.
  • Given the bickering between RBI and the government playing out on the social media, New Delhi and Mint Street would have to strike a common ground if they want to prevent the 19 Nov 18 meet from becoming an inconclusive and acrimonious session.
  • It is unclear to what extent the RBI brass would like to be answerable to the board. Also, the proposal to tap RBI’s reserves to maintain government’s fiscal deficit or recapitalise banks had not gone down well within RBI.
  • Among the issues that were discussed in the previous board meeting in Oct 18 were possible regulatory moves that could improve credit flow to small and medium sized businesses and relaxing lending restrictions on 11banks.
  • The government’s move towards invoking Section 7 of the RBI Act, which empowers it to issue directions to the central bank, has widened the differences between the Centre and the central bank.
  • As per law, the government has to first consult the Rbi governor before invoking section 7; however, the government can go ahead with the direction even if the governor disapproves the proposal.

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