The Government needs to maintain the autonomy of the Reserve Bank of India and resolve the impasse over the sudden exit of RBI Governor, Urjit Patel, soon as global investors and rating agencies are keenly watching the development.
Seshagiri Rao, Joint Managing Director, JSW Steel, and a former banker told BusinessLine that any deviation in the autonomy of RBI could lead to a possible downgrade of the country's rating and would have an adverse impact on the economy, particularly when the global economy is still limping amid st the ongoing trade war between the two largest economies -- US and China.
As of now, Rao said the rating agencies are not clear on why Patel exited as he has quoted personal reasons for putting down his papers. If institutional independence is not maintained, it is a worry for foreign investors and the country, he added.
“I do not think any government can compromise on the independence of an institution like RBI. I believe it is a matter of time things get resolved,” he said.
Rao said that the RBI and industry has a contradicting view on liquidity and ground reality. While RBI may be correct in saying that there is ample liquidity with banks, most of the public sector banks are not able to lend as they have been under the ‘prompt corrective action’ framework of RBI.
In April, the Central Government had allocated Rs 52,311 crore to 11 “weak banks” to maintain their minimum capital requirement and put them under PCA. With 11 out of 21 public sector banks placed under the PCA framework, they are not able to lend to the industry.
Public sector banks, which are outside the purview of PCA, are not willing to lend due to lack of capital and non-performing asset overhang. The economy is seeing a slowdown due to liquidity constraints which hurts demand and leads to delay in fresh investments.
Pumping in liquidity into banks for onward lending to the industry is not working out. Both RBI and the government, which has to provide the capital, should find a mid-path to resolve the liquidity crisis by allowing banks under PCA to lend, Rao said.