Editor's Take | RBI’s crucial board meeting: Will the rift end?

A security guard mans the entrance of the Reserve Bank of India

A security guard mans the entrance of the Reserve Bank of India

The Congress has also accused the government of trying to force RBI governor Urjit Patel's exit for not being pliant.

RBI Governor Urjit Patel had meet Prime Minister Narendra Modi last week in a bid to sort out differences between the Centre and the bank regulator.

As the RBI's board of governors started their crucial meeting on Monday, Congress president Rahul Gandhi waded into the ongoing controversy over issues ranging from credit to the medium and small enterprises (MSME) to the central bank's reserves.

Off-agenda items can also be raised in the meeting, with the chair's permission. So far, the signals are mixed.

Sources said the government and Reserve Bank of India (RBI) are looking to reach at an agreeable solution with respect to relaxation of the Prompt Corrective Action (PCA) framework and easing of lending norms for the MSME sector.

The RBI and the Central government are at the loggerheads over the three most contentious issues for days now.

Mr Chidambaram wrote that "November 19 (today's meeting)" will be a day of reckoning for central bank independence and the Indian economy. It has two government representatives, which include secretaries from the departments of economic affairs and financial services.

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On the governance issue, it is increasingly felt that the RBI management must be made accountable to the board. The Central bank has Rs 9.6 lakh crore of reserves in the form of contingency fund and forex and gold reserves and securities. According to reports, the effort could run into some resistance from the bank's independent directors who are nominated by the central government.

While there have been reports and demands from some quarters for the Governor to step down, sources said Patel is unlikely to yield under pressure and will rather mount a strong defence of the central bank's policies regarding stringent NPA recognition norms as well as measures taken to ease credit supply to MSMEs.

In fact, it was Acharya's speech that marked the turning point in a simmering dispute between RBI and the Union government, which has been particularly incensed over the last few months about what it believes are lapses in regulatory oversight of the financial sector: first, in not capturing the Punjab National Bank fraud and second, missing the crisis building up at Infrastructure Leasing and Financial Services Ltd (IL&FS), which in turn is threatening to cascade into a wider crisis at non-banking financial companies (NBFCs).

Though the government had "referred" Section 7 of the RBI Act for "consultation" on these issues, it may refrain from issuing directions as such a move will have wide ramifications.

If neither side is willing to revisit its stance, it is likely that the board would be forced to adopt a vote.

The RBI Act allows for cash transfers to the government kitty.

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