From all appearances, the RBI board meeting was a cordial affair, with both the central bank and the government displaying a great deal of maturity in bringing relations between the two back from the brink. Both sides have softened their stance, and yielded ground as there seems to be a greater appreciation of each other\u2019s point of view. As a result, the government hasn\u2019t given RBI a direction under Section 7 of the Banking Regulation Act (BRA), as it was reportedly intending to do, possibly because it didn\u2019t want to trigger any resignations. But, for a genuine discussion, as opposed to one at gun-point, the government should withdraw the reference under Section 7 since, unless this is done, the central bank will always be acting under fear. RBI, for its part, seems to have realised that, while its independence is important, there needs to be some give and take, especially since markets are short of liquidity, and the situation is a lot worse after the markets froze post-IL&FS. By referring the most contentious issue of RBI transferring to the exchequer a large part of its reserves\u2014which the government believes are higher by global comparison\u2014to a committee that will examine the central bank\u2019s economic capital framework, a sensible compromise has been arrived at. While the composition of the committee will be decided jointly by the government and RBI, it should be manned by persons of the calibre of former CEA Arvind Subramanian and ex-RBI Governor Raghuram Rajan who have both taken very public, and divergent, stands on this. Rajan said recently it was a bad idea to transfer reserves out of the central bank since it is important RBI commands a AAA rating given the government doesn\u2019t. Else, it will become difficult for the country to enter into swap arrangements of the kind that was concluded in 2013. For its part, the central bank has agreed to re-look the PCA (Prompt Corrective Action) framework, something the government has been asking for. It is certainly not desirable to make the norms more lenient, given the fragile financial condition of the 11 banks that are currently under the framework. PCA banks had gross NPAs of 21% in Q2FY19 versus 11.5% for non-PCA PSU banks and 4.4% for private banks. In fact, post the Q2FY19 results, a few more might find themselves with financials that call for a PCA to be initiated. While there is no harm if the Board for Financial Supervision takes another look at this, these banks should ideally be privatised since taxpayers can\u2019t indefinitely be funding their losses; in the absence of this, PCA keeps a check on the losses. While RBI hasn\u2019t given in to the government\u2019s request to lower the minimum Tier I capital adequacy ratio to 8% from 9% for banks, it has agreed to stretch the timeline for them to meet the last tranche of 0.625% required under the Capital Conservation Buffer (CCB) by a year to 2020. Moody\u2019s has already said this would be credit negative, a sentiment RBI probably shares. The relaxation, though, may not really help too many banks since most are struggling to meet even the current CCB requirement of 1.875%. It is just a couple of lenders that will have more room to lend now since they need to hit the 2.5% CCB only in 2020. Where RBI has clearly given in to the government\u2019s demands is on the restructuring of MSME stressed assets with aggregate credit facilities of Rs 25 crore. Diluting forbearance is never a good idea, especially at a time when banks are learning to be disciplined after years of profligacy. Moreover, banks have seen fairly large NPAs on their MSME portfolios. However, RBI seems to have agreed to do this to placate the government. While the government was reportedly looking for a special line of credit for NBFCs, there doesn\u2019t seem to have been any discussion on the subject so far. A special window is a bad idea since it means RBI will bear the credit risk, but the central bank needs to infuse a lot more liquidity in the market and let banks lend to NBFCs. BofAML economist Indranil Sen Gupta estimates that even if RBI steps up OMOs to Rs 50,000 crore a month between December-March\u2014to arrest further lending rate hikes\u2014the money market will still have a liquidity deficit.