Is govt interference eroding credibility of RBI?

Recently, RBI Board agreed to give a whooping sum of 1.76 lakh crore of its dividends to the government under revised Economic Capital Framework agreement.

Economic Capital Framework is the capital assessed by the RBI to counter any future risks and contingencies associated with its operations and objectives.

ECF as bone of contention between RBI and government

While government thinks RBI has enough surplus to tackle exigencies and transfer remaining find to government, RBI wants to keep its surplus as much as possible to successfully tackle any future risks.

Yes if damage the credibility

  • Governments’ pressure to use RBI as a piggy bank certainly damages the credibility of the RBI as an independent institution.
  • RBI, in future, may find it difficult to manage any credit/interest/currency risks owing to its depleted reserves.
  • It will impact RBI’s independence in managing the monetary policy – Governments’ efforts of fiscal stimulus by injecting fresh money into the economy may heighten infection within 4% (±2%) can be a huge challenge for RBI.

No, it does not damage the credibility

  • Statutory mandate –Being the owner of the RBI, the government has every right to own the profit of the RBI to transfer its surplus funds to the government as per section 47 of the RBI act.
  • International practice –Almost every international bank like the US fed Reserve, UK Bank transfers its profits to the government which is common practice across the globe.
  • Economic Necessity –While the economy is showing sign of the slowdown, the government can use the surplus of the RBI to stimulate the economy by injecting the money thus boosting demand through capital and consumption expenditure.

Way forward

Considering the mandate of RBI (growth with stability), independence is necessary may result in its lack of independence operational capabilities and loss of the confidence of the investors. Hence way forward is to institutionalize the permanent and transparent structure for transfer of RBI surplus on the lines of the British government to avoid any reckless cent-seeking by the government.

According to former government Viral Acharya, the government that does not respect the independence of the central bank soon faces the wrath of financial markets. Hence corporation agency RBI and Central government is must achieve the goal of 3 billion USD economy according to NITI AYOG document

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