RBI not taking adequate steps to stem liquidity woes: FinMin

New Delhi: At a time when the government and the Reserve Bank of India (RBI) are at loggerheads over multiple issues involving the central bank’s autonomy, a senior finance ministry official on Wednesday said the central bank wasn’t taking adequate measures to address the liquidity crunch in financial markets. “The liquidity crunch has adversely impacted the automobile and real estate sectors in the economy. RBI has not taken adequate steps to address the liquidity crunch,” the official said.

A series of defaults by Infrastructure Leasing and Financial Services (IL&FS) group companies on debt obligations since late August have triggered concerns about the liquidity situation of housing finance and non-banking finance companies. IL&FS is considered a systemically important non-banking financial company and its debt defaults have sparked fears of sustained shortage in liquidity and capital outflows from financial markets. On Tuesday, a meeting of the Financial Stability and Development Council, which was attended by RBI Governor Urjit Patel, also took stock of the liquidity crunch plaguing the non-banking finance sector.

Last week, the RBI had said it would purchase Rs 40,000 crore worth of bonds under open market operations in November, to inject liquidity into the banking system. In a release on Wednesday, the government said it has respected and nurtured the autonomy of the RBI, but the functioning of both institutions must be guided by public interest and requirements of the economy. “The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement,” the government said in a statement today. “Governments in India have nurtured and respected this. Both the government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy.”

Board to meet on Nov 19

The RBI’s Central Board, headed by Governor Urjit Patel, is scheduled to meet in Mumbai on November 19, sources said amid reported rift between the government and the central bank over certain key issues. Sources said it is a pre-scheduled and routine meeting of the central board of the RBI. The last meeting of the board was held earlier this month. This would be the first meeting of the board after RBI’s Deputy Governor Viral Acharya highlighted the issues concerning the independence of the central bank.

The statement was, however, silent on whether the government had taken recourse to Section 7 of the RBI Act. The RBI and the government have also been involved in a war of words over the central bank’s independence and regulatory powers. In a speech on Friday, RBI Deputy Governor Viral Acharya had warned that the erosion of central bank’s independence could “sooner or later incur the wrath of financial markets”. Acharya’s speech made note of recent friction between the government and the central bank on several issues, including the central bank’s balance sheet, power to regulate public sector banks, and regulation of payment companies. On Tuesday, Finance Minister Arun Jaitley had questioned the role of the RBI at the time of “indiscriminate lending” by banks during 2008-14.

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