RBI's reserves: Letters in Business Line
January 01, 2019
This refers to ‘Don’t need RBI reserves to meet fiscal deficit, says Jaitley’ (January 1). However, the government does not mind ‘using’ the same for recapitalisation of state-owned banks or for a poverty alleviation programme. As regards the issue of Economic Capital Framework (ECF) of the RBI, the Finance Ministry seems to be obsessed with ‘carving out’ a significant part of the central bank’s reserves (which include its ‘revaluation’ reserves). It has been emphasising that central banks of most countries keep a reserve of 8 per cent, while some conservative central banks maintain 14 per cent as against a reserve of 28 per cent being maintained by the RBI.
The government has already constituted a six-member expert panel to decide on the ‘appropriate’ level of reserve of the central bank. Let us hope the expert panel does full justice to the central bank’s mandated autonomy on the matter.
Funds for recapitalisation
The Finance Minister’s statement that the government does not need reserves to meet the fiscal deficit but for bank recapitalisation and for meeting poverty alleviation programme defies logic. Under normal circumstances doesn’t the government otherwise spend for these purposes out of its own kitty? Hence dipping into RBI reserves amounts to nothing but monetising the fiscal deficit. Further, a parallel is drawn between the system followed by the RBI and other central banks globally. For example, the US Federal Reserve transfers surplus beyond a threshold limit which is as per the provisions of the Federal Reserve Act and Consumer Protection Act. Similarly, in the UK too, Bank of England and the Treasury have signed an MoU for transfer of surplus funds. But there is no such clause in the RBI Act. Another glaring difference between Indian and global norms relate to the holding structure wherein in other countries banks are mostly privately owned unlike in India. Doesn’t recapitalisation of banks (PSBs) through funds claimed by the government from the RBI amount to rewarding their own inefficiency, with government being a majority stakeholder in PSBs? The present move has emerged out of desperation on the part of the government since it has come under renewed pressure for funds in view of several iterative changes it has brought in GST rates.