At the press conference post the fifth monetary policy review on December 5, Reserve Bank of India Governor Urjit Patel brushed aside a question on reduction in cash reserve ratio (CRR) saying that it is not in the ambit of the Monetary Policy Committee (MPC).
On the face of it, it might look like he has only stated the obvious. But it is not so black and white. The unasked question on CRR was: why cannot it be voted upon in the MPC? It is after all a liquidity management tool that can impact interest rate. And again, it is not as if the MPC votes only on the repo rate. Though the law mandates voting only on repo rate, there is voting on the policy stance as well. So, why not on CRR as well? Mr. Patel’s answer at the press conference has to be seen in this context.
Observers see this as an emphatic statement on who is the decision-making authority on CRR. There are two other statements in the press conference which are seen as Mr Patel attempting to regain ground lost in the last board meeting of the RBI.
By unambiguously stating that liquidity is no longer an issue for non-banking finance companies, the RBI has virtually ruled out any discussion on the subject during the next board meeting. The issues of providing liquidity for NBFCs and RBI governance are expected to be on the agenda of the next board meeting scheduled for December 14.
The other decision was to form an expert committee for micro, small and medium enterprises.
The central bank noted that without understanding the economic forces and transaction costs affecting the performance of the MSMEs, the often adoptedrehabilitation approach to the MSMEs stress has ‘focused on deploying favourable credit terms and regulatory forbearances.’
With this committee, RBI has ensured that the issue will not be taken up by the board in the near term. The composition of the committee and its terms of reference will be finalised by the end of December 2018 and the report will be submitted by the end of June 2019.