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Inflation control tops RBI agenda for new govt

The Reserve Bank of India (RBI) has drawn up a list of issues that should be pushed by the new government.

With inflation-control on top of RBI Governor Raghuram Rajan’s mind, sources familiar with the developments said implementation of the Urjit Patel committee’s recommendations will be the main agenda the central bank will take up for discussions with the new finance minister. The Patel committee had suggested inflation targeting should be RBI’s singular mandate and the central bank should be accountable for meeting the target.

While some of the recommendations of the panel have already been implemented, the government’s comfort is required for pushing through some of the other key suggestions, such as setting up a five-member monetary policy committee (MPC) with a majority of the members representing RBI.

The finance ministry under P Chidambaram had raised its reservations on the issue and made a detailed presentation to the Prime Minister’s Office (PMO). Since no conclusion was reached during the previous government’s tenure, sources indicated Rajan would engage with the new government on this issue.

Government sources said while presentations on a host of issues to improve the financial sector were ready, it would depend on the priority the new government identifies.

Also among the issues to be taken up with the government is governance of public-sector bank boards. This issue is, again, overdue for a few months, as the RBI governor had written to the banking secretary highlighting the discussions of the sub-committee of the Financial Stability and Development Council regarding governance issue at state-run banks.

The recent report of the RBI-appointed committee on governance of bank boards, headed by former Axis Bank chairman P J Nayak, also recommended some radical changes. It suggested the government reduce its stake in public-sector banks to under 51 per cent. Implementation of some of the Nayak committee’s recommendations will need amendments to existing laws.

Both reports — by the Urjit Patel and the P J Nayak committees — essentially highlight why the government should give up its control on RBI, as well as public-sector banks. In view of this, the new government’s thinking on both the sets of recommendations assumes importance.

The other area is a clear road map on capitalisation of public-sector banks. Government banks, reeling under the pressure of non-performing assets for the past couple of years, have seen their capital erode at a time when the Basel-III norms are being implemented and regulatory forbearance on restructured assets are to be taken away from 2015.

A five-year road map on how much capital the banks will need was prepared by the previous government. State-run banks, assuming 16 per cent growth in assets, will need Rs 5.87 lakh crore of Tier-I capital during the period from January 2014 to March 2018, as estimated by the Nayak committee. Even if the government puts in 60 per cent of the capital required (the average level of government holding in its banks), it will need to invest Rs 3.50 lakh crore.

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