After marathon meeting, RBI board agrees to improve liquidity

Reserve Bank of India. Photograph:( Reuters )

Reuters Mumbai, Maharashtra, India Nov 19, 2018, 09.07 PM (IST)

The board of the Reserve Bank of India (RBI) on Monday agreed to ease liquidity for the financial sector and increase credit to small businesses, two sources present at the meeting said.

The move comes in response to pressure from Prime Minister Narendra Modi's government which faces a general election by next May and is concerned that low farm prices and difficulties small businesses face in borrowing, may hurt its prospects with voters.

Some more contentious issues were kicked down the road to be discussed by newly formed committees, the sources said.

The government has been pressuring the RBI to reduce capital ratios for banks to speed up loans to small businesses. There are five key state elections in the next few weeks and a general election due by May.

"The meeting happened in a very cordial environment. Most of the issues were resolved in an amicable manner," a board member, who attended the meeting, told Reuters.

"A panel will be formed to work out a framework to determine the reserves requirements of the RBI and transfer surplus funds to the government," the board member said.

A litany of demands from top finance ministry officials prompted warnings from RBI Deputy Governor Viral Acharya last month that undermining central bank independence could be "catastrophic," triggering a public feud between the bank and the government.

Expert panel to examine economic capital framework

The Reserve Bank of India said on Monday it has decided to set up an expert panel to examine the economic capital framework of the central bank, in a move that could prompt a rethink of what constitutes adequate capital reserves for the central bank.

For weeks, government officials have been pressuring the RBI to accede to a range of demands, from easing lending curbs to handing over surplus reserves to the government.

The government and the central bank will jointly decide on the members of the panel and the scope of the panel, the RBI said in a statement late on Monday.

In addition, the RBI said its financial supervision board will examine the issue around easing of the prompt corrective action plan for some banks - another key of contention between the government and the central bank.

Story highlights

The government has been pressuring the RBI to reduce capital ratios for banks to speed up loans to small businesses.