Following a mammoth nine-hour meeting with board directors, the Reserve Bank of India (RBI) announced it will work together with the government with a set of new fiscal strategies.
The RBI unveiled plans to establish a committee to examine its reserve management as well as look into offering more support for struggling banks.
It pledged a review of the ‘Prompt Corrective Action’ framework, currently in place for 11 state-controlled banks, which enforces lending restrictions on troubled financial institutes.
The helping hand will be a welcomed move by the Modi government who have been pressuring the central bank to ease restrictions ahead of the general election in April or May 2019.
Government officials had expressed fears that market liquidity was being compromised by the PCA measures.
Vivek Dehejia, a fellow at the IDFC Institute, said the government “is pretty much getting everything it wanted”.
He said: “It looks like the government is really turning the screws and they’ll get their way one way or the other.”
In a boost to small businesses, the RBI said it would potentially look into a programme that would restructure stressed loans.
It also vowed to extend a deadline for banks to meet a risk-weighted capital adequacy ratio of 9 per cent by one year.
The rupee continued its winning streak against the US dollar off the back of the meeting, appreciating further as it clawed back ground.
The rupee was trading at 71.46, according to data from Bloomberg, marking a six-day high for the Indian currency.
At its worst, the rupee lost about 14 percent of its value against the US dollar this year, making it the worst performing currency in Asia at the time.
But some breathing space was found in recent weeks as the price of oil slowly pulled back, following announcements of a cut back in production planning for next year.
According to Piyush Goyal, Minister of Railways in India, the meeting between RBI board of directors ran without friction between the government and bank.
When asked if confrontation had occurred over the bank’s responsibilities towards India, Mr Goyal was quoted by The Economic Times India as saying: “We are not seeing any tension between government and the RBI.
“Only Congress chief Rahul Gandhi and you people are showing the signs of tension.”
He added: “The government has already clarified that it has not asked for even a single rupee from RBI’s reserve fund.”
The RBI shocked financial analysts as it went against predictions by holding interest rates at the start of last month.
Its monetary policy committee (MPC) left the repo rate unchanged at 6.50 percent, with five out of six panel members voting to hold the rate.
Defending the decision, the bank said it was acting “to further strengthen domestic macroeconomic fundamentals”.
Published at Tue, 20 Nov 2018 14:06:00 +0000