Pressure on RBI to part with funds
BRP Bhaskar
The Reserve Bank of India, which is banker to the Central and State governments and regulator and supervisor of the country’s monetary system, is under pressure from the Modi administration to pass on to it a big chunk of its reserves.
According to media reports, the Finance Ministry wants the RBI to transfer to the Centre Rs 3,600 billion out of its reserves of Rs 9,590 billion, and it says no.
More ominously, the Ministry wants joint management of the reserves by the Centre and the RBI. This will not only destroy the RBI’s autonomy and inhibit its ability to perform its functions well but also allow the government easy access to the central bank’s reserves which play a critical role in ensuring the nation’s financial security.
Initially, the government did not deny reports about its differences with the RBI. On the contrary, it virtually confirmed them and offered palpable justifications for threatening the RBI’s autonomy.
It argued that the RBI had overestimated its requirements of reserves, and could do with much less than what it holds now.
It also claimed the RBI’s existing economic capital framework was determined by its board of directors at a meeting at which two government nominees were not present.
As the Opposition parties and financial experts criticised the government for attempting to erode the RBI’s autonomy and reports circulated that RBI Governor Urjit Patel was preparing to quit, the government began a damage control exercise.
Subhash Chandra Garg, a Secretary in the Finance Ministry, in a tweet, described the reports as “misinformed speculation” and said there was no proposal to ask the RBI to transfer Rs 3,600 billion or even Rs 1,000 billion.
However, Prime Minister Narendra Modi and Finance Minister Arun Jaitley said nothing that could reassure critics.
One of the two directors nominated to the RBI board by the government recently is S. Gurumurthy, a chartered accountant better known as an ideologue of the Rashtriya Swayamseval Sangh, the ruling Bharatiya Janata Party’s mentor.
Reacting to the media reports, the RSS said the Governor should cooperate with the government or quit.
Set up by the colonial administration in 1935, the Reserve Bank of India’s functions include formulation, implementation and monitoring of monetary policy and laying down the broad parameters within which commercial banks must operate.
Successive Central governments have respected its autonomy, recognising the need for it to be free from political control to discharge its onerous responsibilities.
The RBI has an equity capital of only Rs 50 million but pays the Centre a handsome dividend each year. The dividend for the current fiscal is Rs 500 billion.
The RBI is one of the few central banks of the world which regularly updates its history. It has so far published four volumes which cover its working from 1935 to 1997.
Chicago University professor Raghuram Rajan, who, while serving as Chief Economist at the International Monetary Fund in 2005, had forecast the 2008 crisis in the US financial system, was the RBI’s Governor when Modi became the Prime Minister in 2014. His monetary policy helped check inflation and raise foreign exchange reserves.
When Modi consulted the RBI on his demonetisation plan of 2016, Rajan advised against it and warned of potential negative effects. Although he was ready to serve another term, Modi decided to look for someone amenable. Rajan returned to his Chicago University job.
Last week, on the second anniversary of demonetisation, Rajan said the world economy had picked up last year but India could not do as well as it should have done because of the disruption caused by the note ban and the hastily introduced Goods and Services Tax.
While the government’s publicly advanced argument for seeking RBI funds is that the central bank has more reserves than it needs, the real reason maybe something else. Either it is experiencing a cash crunch, which it is unwilling to acknowledge publicly, or it is looking for funds to launch populist schemes ahead of next year’s parliamentary elections.
Another indication of its urgent need to raise money is the reported decision to sell company shares which were declared “enemy property” after the shareholders left for Pakistan or China following the wars with these countries. Their current worth is estimated at more than $400 million.
Whether the government will press ahead with the plan to squeeze money out of the RBI or pull back will be known when the bank’s board of directors meets next Monday. --Gulf Today, Sharjah, November 13, 2018
According to media reports, the Finance Ministry wants the RBI to transfer to the Centre Rs 3,600 billion out of its reserves of Rs 9,590 billion, and it says no.
More ominously, the Ministry wants joint management of the reserves by the Centre and the RBI. This will not only destroy the RBI’s autonomy and inhibit its ability to perform its functions well but also allow the government easy access to the central bank’s reserves which play a critical role in ensuring the nation’s financial security.
Initially, the government did not deny reports about its differences with the RBI. On the contrary, it virtually confirmed them and offered palpable justifications for threatening the RBI’s autonomy.
It argued that the RBI had overestimated its requirements of reserves, and could do with much less than what it holds now.
It also claimed the RBI’s existing economic capital framework was determined by its board of directors at a meeting at which two government nominees were not present.
As the Opposition parties and financial experts criticised the government for attempting to erode the RBI’s autonomy and reports circulated that RBI Governor Urjit Patel was preparing to quit, the government began a damage control exercise.
Subhash Chandra Garg, a Secretary in the Finance Ministry, in a tweet, described the reports as “misinformed speculation” and said there was no proposal to ask the RBI to transfer Rs 3,600 billion or even Rs 1,000 billion.
However, Prime Minister Narendra Modi and Finance Minister Arun Jaitley said nothing that could reassure critics.
One of the two directors nominated to the RBI board by the government recently is S. Gurumurthy, a chartered accountant better known as an ideologue of the Rashtriya Swayamseval Sangh, the ruling Bharatiya Janata Party’s mentor.
Reacting to the media reports, the RSS said the Governor should cooperate with the government or quit.
Set up by the colonial administration in 1935, the Reserve Bank of India’s functions include formulation, implementation and monitoring of monetary policy and laying down the broad parameters within which commercial banks must operate.
Successive Central governments have respected its autonomy, recognising the need for it to be free from political control to discharge its onerous responsibilities.
The RBI has an equity capital of only Rs 50 million but pays the Centre a handsome dividend each year. The dividend for the current fiscal is Rs 500 billion.
The RBI is one of the few central banks of the world which regularly updates its history. It has so far published four volumes which cover its working from 1935 to 1997.
Chicago University professor Raghuram Rajan, who, while serving as Chief Economist at the International Monetary Fund in 2005, had forecast the 2008 crisis in the US financial system, was the RBI’s Governor when Modi became the Prime Minister in 2014. His monetary policy helped check inflation and raise foreign exchange reserves.
When Modi consulted the RBI on his demonetisation plan of 2016, Rajan advised against it and warned of potential negative effects. Although he was ready to serve another term, Modi decided to look for someone amenable. Rajan returned to his Chicago University job.
Last week, on the second anniversary of demonetisation, Rajan said the world economy had picked up last year but India could not do as well as it should have done because of the disruption caused by the note ban and the hastily introduced Goods and Services Tax.
While the government’s publicly advanced argument for seeking RBI funds is that the central bank has more reserves than it needs, the real reason maybe something else. Either it is experiencing a cash crunch, which it is unwilling to acknowledge publicly, or it is looking for funds to launch populist schemes ahead of next year’s parliamentary elections.
Another indication of its urgent need to raise money is the reported decision to sell company shares which were declared “enemy property” after the shareholders left for Pakistan or China following the wars with these countries. Their current worth is estimated at more than $400 million.
Whether the government will press ahead with the plan to squeeze money out of the RBI or pull back will be known when the bank’s board of directors meets next Monday. --Gulf Today, Sharjah, November 13, 2018
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