Central Bank V/s Central Govt…The Big Picture

As the government is running short of cash and concerned about the election of 2019, it is not leaving any scope to extract money from the RBI.

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Central Bank RBI Reuters

A photo taken by RBI central bank of India.

The central government, under the supervision of Prime Minister Narendra Modi, had signed a deal with the RBI or Reserve Bank of India a few years back. This step was taken by the Indian government to allow the Central Bank of India an institutional independence and a clear mandate. Hence, the RBI will target the price inflation for the consumers and will set the rate of interest accordingly. In fact, the rate of interest will be set by a committee of 6 people, out of which 3 will be expert economists. Hence, the RBI can be considered as a top-notch institution which is loaded with numerous positive attributes. 

Related: 2 Years on, India still Gripped with Negative impacts of Demonetization

How did the scenario of a cold war between the Mint Street and North Block in Mumbai and Delhi respectively, occur?

Viral Acharya, the Deputy Governor of RBI has launched a broadside in a speech against the government. This clearly warned against the violation of the independence of Central Bank and mentioned that eroding the same may prove to be catastrophic. He was recruited by the Modi-led government and not the former UPA government. He didn’t speak for himself in the speech. Rather, he expressed his gratitude to the other Deputy Governors and specified that he was asked by the governor to speak on the aforementioned topic.

The RBI has a huge amount of cash with them. The bonds owned by the banks earn handsome interest, leading to the accumulation of a considerable amount of money. A portion of the profit is handed over to the government, which was previously around INR 50,000 to 60,000 crores. However, this amount depleted to INR 30,000 crores after the demonetization hit the market. Another disagreement is regarding the total capital owned by RBI. The confusion is whether the money should be transferred to the government or must be kept with the RBI itself. 

Related: What will happend to the Indian Economy if Narendra Modi loses 2019 elections?

Raghuram Rajan even stated that the Reserve Bank of India has paid more to the government in dividends under his supervision than it has done in a decade before his appointment. 

However, the government is singing to a different tune and not satisfied. It is looking forward to getting the entire sum of money kept in reserve to the RBI. Viral Acharya also stated that the government is hopeful to get the reserved INR 3.6 lakh crores. In fact, the government has stated that this whopping amount is excessive and must be handed over to the government. 

If you are flabbergasted by the amount kept in reserve of the RBI and thinking what is wrong with the demand of the government, you must be aware of the real picture. One is that RBI needs the amount of money to run the operations smoothly. The operations include management of the foreign exchange and money in the markets in case of any crisis or emergency. Also, the amount is considered as the lender of last resort and banking regulator in case the financial system crashes. This will come as a savior if the entire structure comes down. 

Viral Acharya also stated that the government is not leaving any stones unturned to extract the cash out of the RBI and even raiding on the vaults of the central bank. It is focusing on the upcoming election in 2019. In fact, this activity is considered as the erosion of the positive strength and independence of the RBI, resulting in a severe impact across the board. 

Also, the investors must have faith in the central bank and rest assured that it is not working to offer financial assistance to the government but looking forward to keeping the market liquid and secure. The central bank also urged the investors to rely on the central bank as this will instate the trust on the comprehensive financial system.

As the government is running short of cash and concerned about the election of 2019, it is not leaving any scope to extract money from the RBI. The policyholders of the Life Insurance Corporation offered money to the prominent insurers so they can invest wisely. On the other hand, the government is imposing LIC to spend on the priorities of the government like saving for the IDBI bank, which is in a troubled corner. 

If you are thinking about the small-scale investments like the PPF or Public Provident Fund, the fund associated with this is safe as it relates to lakhs of retired Indians. However, the government is taking money for its personal profit to make up for the loss imposed by Air India. Are you concerned about your portion of money being spent in the PPF after learning that the government is investing the capital on Air India? The truth behind the endeavor is the government wants to take advantage of the funds comprehensively. It wants the people to believe that government is responsible for the people’s money and is not over-spending. Also, it wants the people to know that it will meet the fiscal deficit target set at 3.3% of GDP. However, the government wants to execute the expenditures freely. Hence, the government wants to take all the money from the RBI and other sources, which must not be disturbed. 

The government is looking forward to setting up a payments regulator independently. This body will look after the digital payments by taking the amount out of the range of the RBI. This may prove to be a good concept but the RBI is not hopeful about the plan as it may result in an unstable financial system. 

Another concern is regarding the banks from the public sector. As the banking regulator, the RBI has rights over the banks from the private sector. On the contrary, it doesn’t have similar authority over the banks regulated by the government. 

This criterion puts the allegation brought about by the Finance Minister Arun Jaitley under a different light. He had blamed the RBI for not being able to avoid the crisis of the bad loans in the banks under the public sector. However, the reality is unless the RBI is bestowed with the similar powers as the private sector banks, it will not be able to get a firm control over the activities like changing the boards, revoking the license, and others. Hence, the government is at fault in this case as it has allowed the public sector banks to conceal the bad loans for a longer period than needed. Now, the only way to get the banks on the right course is to move the decisions of the banks from the public sector to the private.

Urjit Patel, the governor of RBI is facing an intense criticism for signing off on the single economic policy, which has ever failed, demonetization. Though he was appointed by Narendra Modi, he will not step back from protecting the independence right of the RBI.

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