INVESTOR EDUCATION INITIATIVE !
RBI demands autonomy from Union Govt. What it means to us as Investors?
Reserve Bank of India and the Union Government particularly the Finance Ministry has not been seeing eye to eye with RBI. This has been going on for quite some time. In fact it started from the days of Dr. Raghu Ram Rajan when the the Govt. asserted, of course as the Major Stakeholder, its right over RBI and formed a new Committee known as Monetary Policy Committee (MPC) to rein in the sole power of the RBI Governor in fixing the reserve rates. From then on the friction commenced. When the PNB episode of monstrous proportions of huge fraud emerged, both of them started accusing each other for this diabolic designs. RBI on its part contended that the CEOs of PSBs are selected by the Govt. and their sustenance is based on the sweet- will of the Govt, RBI said that it could not do much. Of course the selections were devoid of merit and on various extraneous grounds including political convenience. Even the recent appointment of political enthusiast of the ruling party as the Director of the central board of RBI leaves much to be desired. The RBI’s hard stand on classification of advances to various sectors for NPA based on defaults left the Govt with a hot face as many in Power, steel sectors were brought under the new tough classification leading to cases under the NCLT. This has brought in a lot of embarrassment to the Govt and has been resisted by it tooth and nail. The currency demonetization done 2 years back to bring out the black money to the surface by the Centre unilaterally has not yielded the desired results and it was proved to be a wrong move based on the statistics. The Fiscal deficit of the Government is ever increasing and it is a cause for concern. The Rupee depreciation and galloping oil prices have all contributed to the frustration of the Government. The bond rate increase, failure of ILFS and other similar NBFCs in their incapability to service their debt obligations, huge FPI sale in Stock markets et al added fuel to the volcano.
Given the financial constraints and the economic woes, the Govt at the Centre takes refuge in blaming the RBI for its own lapses and says that the RBI was responsible for the huge NPAs. The Prompt corrective Action (PCA) imposed by RBI on weak banks has earned the wrath of the Govt. as credit flow has decelerated much to the chagrin of political bosses. While the Govt appointed nominees were there on the board of PSBs, including RBI, the calamity could not be averted. The great fall of the PNB with so many other counterparts reporting huge losses quarter after quarter could not be contained. RBI contented that they have no powers over the functioning of the CEOs of PSBs as their appointment and pink slips are issued only by Govt. Political influences in sanctioning loans in PSBs has been rampant and perhaps the objectives of nationalization were tailor-made to suit the ruling parties leading to huge NPAs in PSBs.
Dr RaghuRam Rajan , the Governor earlier has commented now that the erosion of the powers of RBI will do more harm than good for the economy as a whole and particularly for the Capital markets. RBI’s major role has been to contain inflation which has been fairly accomplished by them. The major problem prevailing at present is ‘Liquidity’ as M3 has fallen from 14 % to less than 10 % which RBI should take cognizance of and consider easing it out by announcing some sops for Banks and reducing the reserve rates. This will boost the Capital market and IIP. The Govt. also leaked the information that it would invoke Sec 7 of the Reserve Bank of India Act 1934, which would enable them to dictate terms to RBI to fall in line with them. This also evoked a rumor that RBI Governor would put in his papers if it is ventured for the first time. The crucial Nov 9th RBI Board meeting would be crucial. Another area of conflict has been that The Union Govt. is insisting that RBI should transfer its surplus amount of at least one third out of Rs 9.60 Lakh crore in reserves to Government to be used to recapitalize the ailing Banks.
But the investors at large, need not be concerned with the ongoing tussle between Govt and RBI as it is quite normal and is also not the first time. It is not going to impact much the capital markets which is of course, influenced by other factors like rupee’s depreciation, Fiscal deficit, widening Current account deficit, Bond market upswing, FPI exit et al. So it is time to watch the market which is certainly providing an opportunity to invest now as is evidenced by the Muharat Trading.
Wish you all good luck and profitable investment !