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Modi and Reserve Bank of India bury the hatchet

Committee will be formed to look into central bank's capital reserves

Board members of the Reserve Bank of India held a nine-hour meeting on Monday.   © AP

MUMBAI -- The Reserve Bank of India has found common ground on key issues that have put the central bank and the government of Prime Minister Narendra Modi at loggerheads for the past few months.

While some issues such as the RBI's surplus reserves have been entrusted to an expert committee, the Reserve Bank has decided to take another look at some of its recent policies relating to lending restrictions at weak banks.

In a marathon nine-hour meeting Monday attended by all 18 board members, it was decided that an expert committee will be formed to examine the Economic Capital Framework. This framework governs the bank's capital requirements and transfers of surplus reserves to the government.

The board also asked the central bank to consider a scheme for restructuring the stressed assets of small and midsize businesses with up to 250 million rupees ($3.49 million) in aggregate loans.

The rift between the bank and the government came out into the open last month after RBI Deputy Gov. Viral Acharya gave a speech stressing the importance of the institution's independence.

"The risks of undermining the central bank's independence are potentially catastrophic, a self-goal of sorts [that] can trigger a crisis of confidence in the capital markets," he said in a public lecture on Oct. 26.

The disagreements revolve around policy issues such as liquidity for nonbank financial companies, capital requirements for weak banks and lending to small and midsize businesses -- areas in which the RBI's actions have been at odds with the government's expectations.

The government wanted the bank to make loans for small businesses cheaper and more easily available, in addition to providing liquidity to shadow banks, and easing restrictions on 11 state-run banks on the RBI's Prompt Corrective Action List -- a framework for limiting the banks' lending activities until they show improvements in profitability and asset quality.

"With regard to banks under PCA, it was decided that the matter will be examined by the Board for Financial Supervision of RBI," the central bank said in a statement following the board meeting.

The government has also been pushing the central bank to open up its reserves so New Delhi can spend on programs without disturbing its fiscal deficit target.

The spat has spurred speculation that RBI Gov. Urjit Patel might resign. Some reports have suggested that Deputy Gov. Acharya may also leave.

In addition to Patel and four deputy governors, the bank's board is made up of two Finance Ministry officials, five others from government and two independent professionals linked with the ruling Bharatiya Janata Party and its Hindu nationalist ideological parent organization, Rashtriya Swayamsevak Sangh.

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