Baseless controversies over RBI

The many baseless controversies over RBI’s surplus transfer

This blog describes on many baseless controversies over RBI surplus transfer. Rakesh Mohan, former Reserve Bank of India deputy governor. As well as member of the Bimal Jalan committee which finalizes the central bank’s economic capital framework. He explains the underlying approach in an interview.

Baseless controversies over RBI

According to Mohan a central bank’s balance sheet is a function of its policy mandate. In India, RBI not only has a mandate to keep inflation at the retail level between 2% and 6%. It is also responsible for financial stability.

Therefore, the level of reserves RBI should holds is bound to influence by the statutory mandate that decides by the political executive.

For long, RBI works out its reserve requirements and the attendant surplus which needs to transfer to government on formula basis.

In his last speech as RBI governor in September 2016, Raghuram Rajan said:

“The RBI Board has adopted a risk management framework which indicates the level of equity the RBI needs, given the risks it faces. The dividend policy of the RBI then becomes a technical matter of how much residual surplus is available each year after bolstering equity. Frameworks thus reduce the space for differences.”

Rule based approach on baseless controversies over RBI

Presence of rule-base approach suggests that earlier controversy over the extent of RBI’s reserves is entirely in misplace. If the finance ministry felt that it was time to take a re look at RBI’s reserves as flexible inflation targeting includes in its mandate three years ago. Hence, it should be asked for a technical committee to re-visit the subject.

One good thing of Jalan committee’s report is that controversy over surplus which transfer to government comes to an end.

Winding up

That is, once the dust settles on the meaningless accusation of government raiding RBI’s balance sheet. The government has not raided RBI’s balance sheet. But the political controversy today on the Rs 1.76 trillion transferred to government. It is partly because of the baseless controversy catalyzed by ill-informed comments made earlier by finance ministry bureaucrats  about the large quantum of extra reserves held back by RBI. DISCLAIMER : Views expressed above are the author’s own.

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