RBI Governor Urjit Patel's deposition before the Standing Committee on Finance yesterday did not have much good news for the Modi government. He reportedly not only reiterated the regulator's stand on autonomy and maintaining its current level of reserves, but also told law makers that the impact of demonetisation was transient.

"The governor appeared absolutely clearheaded in defending RBI's autonomy even though he chose to be extremely dignified in his responses and avoided any direct criticism of the government or the finance ministry in this context," a member of the panel told The Economic Times.

The RBI governor, however, did not answer specific questions on the government's move to invoke the hitherto-unused Section 7 of the RBI Act, non-performing assets (NPAs) and other contentious issues, according to people present at the meeting. Instead, Patel said that he would submit written responses on these issues.

He reportedly also assured the 31-member parliamentary committee, headed by senior Congress MP Veerappa Moily, that he would provide details on the specifics of certain NPAs held by various banks, although some members told the daily that Patel made it clear that the NPA levels were not so alarming. He has been asked to file written replies in 10-15 days given the large number of questions.

Responding to a series of questions raised on the recent RBI-Finance Ministry rift by panel members, including Opposition MPs Digvijaya Singh, Bhartruhari Mahtab and Dinesh Tripathi, Patel reportedly batted for safeguarding RBI's autonomy. He asserted that the regulator's autonomy was essential to the interests of depositors as well as the credibility of the Indian economy before international rating agencies.

Significantly, the governor also addressed the issue of the level of currency reserves held by the apex bank for the first time since the public Finance Ministry-RBI face-off. These reserves and their appropriate size have long been a major bone of contention between the two.

According to The Times of India, Patel informed the panel that the RBI's current currency reserves are required in view of the international volatility and in order to maintain high creditworthiness, thereby hinting that the Centre may not receive higher cash transfers soon. "These reserves are meant to be used during periods of stress and not for meeting normal needs," Patel was quoted as saying. This is pretty much what the RBI has been saying all along. It believes the current level of reserves are needed as a buffer against oil price shocks, rupee depreciation, the exit of foreign investors from the markets and the like.

In its marathon nine-hour meeting held last week, the RBI's board had decided to constitute a committee of experts to examine the economic capital framework (ECF) and determine the appropriate levels of reserves the central bank ought to hold. The RBI is reported to be holding a massive Rs 9.59 lakh crore of reserves, but it claims that a large part of this is notional and ought not to be disturbed.

Some BJP members on the committee, including Nishikant Dubey and Shivkumar C Udasi, also asked questions on the implementation of the Basel III capital adequacy norms for banks, pointing towards India's enthusiasm while many signatories are not following it in letter and spirit. In response, Patel reportedly said that adherence to the global norms was India's commitment to G-20 nations as well as a matter of credibility.

Making a presentation on the state of economy, sources told PTI that the governor's views were "optimistic". Patel predicted that the economy would get a boost from oil prices cooling off from four-year highs and asserted that the fundamentals were "robust". Panel members were also informed that credit growth stood at 15%, inflation dropped to 4% and cash to GDP ratio had also improved. However, on the question of demonetisation's impact on the economy, the governor said it was only transient as the volume of credit outflow had gone up by 15.5%.

Post examining Patel's written responses, the Parliamentary Standing Committee on Finance will decide whether a second appearance is required or not. The committee has been divided on the Modi government's note ban decision. In August, the BJP MPs on the panel, who are in majority, had stalled the adoption of a contentious draft report on demonetisation that is critical of the decision.

With PTI inputs

(Edited by Sushmita Choudhury Agarwal)