Ahead of the crucial board meeting of the Reserve Bank of India (RBI) on Monday, its central board member S Gurumurthy on Thursday stated that the standoff between the government and the central bank is “not a happy thing,” but supported the government’s stand for relaxation of norms for weaker banks. Gurumurthy said demonetisation and Goods and Services Tax (GST) have “hit” the micro, small and medium enterprises (MSME) sector, asking for more credit for the sector, which has been “starved of money” and “robbed of credit”.
Highlighting the NPA issue in the banking sector, Gurumurthy, who is also the co-convenor of RSS-affiliated Swadeshi Jagran Manch, said that the problem of stressed assets has arisen by providing for NPAs “at one go” rather than spreading it over a period of five years. He added that recapitalisation bonds can be used for fund infusion in PSU banks.
“The standoff between RBI and Government is not a happy thing at all. But this is part of the overall thinking ecosystem of India to look only to America. I will not put this as a kind of issue only with the RBI, it is with media, economists, with intellectuals because you don’t think of an alternative. But I think an alternative is necessary and exists also. That is part of an overall correction of the Indian mind. You cannot point one institution as something which has to bring it,” he said.
On the surplus reserves with the RBI, Gurumurthy cited two studies to say that they had stated 12 per cent reserves and 18.76 per cent as the adequate level of reserves and that a policy needs to be worked out to decide the level of reserves with the central bank. “But now the RBI has some — according to the latest balance sheet — 27-28 percent, which would have gone up because of the depreciation in the value of the rupee…the appreciation in the value of the dollar is the reserve of the RBI…in this, some policy will have to be worked out. I don’t think the government is asking for that. As my understanding goes, the government is only asking for a formulation of a policy as to how much reserve the central bank must have. Most central banks don’t have reserves of this kind at all, only RBI has these kinds of reserves,” he said, while delivering a lecture at the Vivekananda International Foundation (VIF).
Gurumurthy said the area of dispute between the RBI and the government is regarding the revised prompt corrective norms (PCA). “The PCA bank policy came in 2002, but there has been certain revisions of the norms, that is the area of dispute between the government and RBI,” he said.
Terming India as a bank-driven economy, he said India is following the Basel norms, resulting in less money with banks. “I don’t know from where this 9 percent was got by the regulator. We are doing more than what Basel wants and so the banks have less money to lend. These are all the things on which there is no discourse in India. There are only four internationally active banks in India. All others are domestic banks. They need not have 8 percent capital. They are forced into having 9 per cent capital…,” he said.
He also said that the liquidity problem could have been handled if the powers to print currency remained in the hands of the government. “Government of India has given up the right to print rupee in 2002, so it cannot print money to infuse liquidity,” he said.
Gurumurthy further said dollar-rupee relationship is working against rupee for the last several decades and the government is “probably thinking” of moving towards Yen. “We are having $147billion of foreign exchange in terms of dollars. Rest in other currencies. Now the government is probably thinking that we should move more toward Yen because Yen has a natural hedge against dollar because it is running a current account surplus and it has $1 trillion investment in American securities. So our natural partner should be Japan,” he said.