Reserve Bank of India (RBI) Governor Urjit Patel met Prime Minister Narendra Modi on November 9.
According to sources familiar with the development, Dr. Patel apprised the central bank’s rationale for its discomfort over a series of demands made by the Finance Ministry, including higher dividend and lower capital requirement for banks.
The meeting assumes significance ahead of the central bank’s board meeting scheduled on November 19.
The meetings, which some said also included with the Prime Minister, came amid a face-off between the central bank and the Finance Ministry over issues ranging from appropriate size of reserves that the RBI must maintain to ease of lending norms to step up growth in an election year.
Sources said there are indications that the RBI may create a special dispensation for lending to small and medium enterprises, but it was not immediately clear if an agreement has been worked out to ease liquidity situation for non-banking finance companies (NBFCs) and the RBI parting with its substantial part of its surplus.
Tensions between the RBI and the government have escalated recently, with the Finance Ministry initiating discussion under the never-used-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI Governor.
RBI Deputy Governor Viral Acharya had in a speech last month talked about the independence of the central bank, arguing that any compromise could be "potentially catastrophic" for the economy.
Last week, Economic Affairs Secretary Subhash Chandra Garg had said the government was not in any dire need of funds and that there was no proposal to ask the RBI to transfer ₹3.6 lakh crore.
He further said the only proposal "under discussion is to fix appropriate economic capital framework of RBI".
Economic capital framework refers to the risk capital required by the central bank while taking into account different risks. The Reserve Bank of India (RBI) has a massive ₹9.59 lakh crore reserves.
Crucial board meeting
Mr. Patel's meetings at the PMO came days before the RBI's crucial board meeting on November 19 during which contentious issues are likely to come up for discussion.
Sources said the government nominee directors and a few independent directors could raise the issue of interim dividend along with the capital framework of the RBI.
However, any change in the central bank's economic capital framework can be carried out only after making amendments to the RBI Act, 1934.
Other issues which could be raised include alignment of capital adequacy norms with those in advanced countries and some relaxation in the Prompt Corrective Action framework, sources said, adding more measures to enhance lending to MSMEs and NBFCs may also be discussed.