Expect decisions on economic capital framework to be implemented this fiscal, says Niti Aayog

Of course, it is very welcome and I am glad that better sense has prevailed on all sides and I hope this is a precursor to the macro-economic management team in the country working together. Yesterday’s meeting - long marathon as it was - I think in some sense a milestone because it is clear now that the two sides have agreed to approach the issues facing the economy together in a convergent manner and I hope therefore better results will be achieved going forward.

Not at all, I don’t think that should be concluded in anyway. I was a member of the RBI board, which considered the economic capital framework and even at that time it was clear within the board that the new economic capital framework should be decided, brought upon after the discussion with all people concerned.

The autonomy of the RBI is for it to seek advise from wherever possible to get into discussions, to get all the opinions that it can and then make up its own mind and to that extent, after this committee has met and submitted its report, it will ultimately be the RBI board, which will decide on what is the adequate level of capital reserves and nobody else. So to that extent, the autonomy of the RBI is completely enshrined, it is still preserved.

I think It will be quite a premature for me to make a comment on this at this moment given that there is a committee now which is going to look into all these issues. However, the only thing that I could say is that there are some well-established international norms for the adequacy of capital reserves of central bank and that should be one of the principal guiding factors before this committee, which is going into the issue.

Yes but all those models have been well-studied by all concerned people. I think this is available. The committee itself represents the much-needed attempt to reach a common ground and to reach a balance and neither side digging their heels into it. So when you set up a committee, you set it up to find the middle-ground and to find the balance between two opposite views and I think it should not take very long as far as I can make out. They are not going to do any primary research. I would expect it within this fiscal year.

I think so. In time for the decision whatever it is to be implemented within the fiscal year.

I do not think that’s anybody’s case. Nobody would want to weaken the central bank and its capital reserves and would want to make sure that it has the capital reserve that it needs plus a little more for the rainy day. So I doubt if there is anybody who is making that suggestion that you just said.

I am not so sure about that because the point is that in 2013 when the new norms were announced and it was, in my view, announced suo motu by the RBI that Indian banks need to have capital adequacy reserve ratios of higher than Basel which itself is a pretty stringent criteria that you have.

I have always maintained and I have no hesitation in saying it that in a country where about three quarters of the banking assets are sovereign guaranteed and in effect, all banks have an implicit sovereign guarantee, I cannot see the reason for a norm which is higher than Basel-3. After all whatever the RBI stipulates or whatever the commercial banks do, ultimately affect all of us; you, me and all those who are represented on a board there because it does represent the commercial banks’ ability to leverage, it determines their ability to extent credit etc.

All boards of central banks do have a representative of different segments of the society and the decision-making in the bank, a board should be an active member in that.

The board represents the government of India and it is accountable to the people of India who elected them. In fact, the other side of the argument is that the RBI is not accountable to the Parliament. It is only once in a while called to the standing committee but the government in office is permanently accountable to the Parliament and therefore, if something misfires, for example, if the growth turns turtle in the country or if the inflation spikes, it is not the RBI management ever changed, when inflation went up to 12 percent or 10 percent etc., it’s the government which has held accountable.

So for any argument to be made that the RBI management can in some sense supersede the board because it's questioned by the standing committee of the Parliament, I think it has no ground to stand.

I am not sure it wasn’t a discount and if wasn’t discussed, I am a bit worried because it should have been discussed. The immediate problems of credit freeze and downsizing of NBFC’s balance sheet etc. may well have been tided over for a while, for the month of November, but I can see that in the next three months and coming up to the end of March, there is another big spike coming up and we need to be very careful with what happens with the sector because there are certain large NBFCs who may have a systemic impact.

By the way, one of my concerns is that the NBFC issue has not been addressed at least to my satisfaction.