November 05, 2018

Eroding the functional autonomy of RBI

Resident Senior Fellow Vivek Dehejia writes in Mint on why short-run political calculations might lead to long-term damage to the Indian economy. Excerpts below:


"Writing in this space almost a month ago (“Ill winds blow on Mint Road”, 8 October), I had warned that, in my judgement, the Narendra Modi-led government was getting ready to turn the screws on the Reserve Bank of India (RBI) and its governor, Urjit Patel. Regrettably, that is exactly how matters have played out since then and we are currently on the cusp of a crisis that is unprecedented in our post-liberalisation economic history.


The history and main points of contention will be familiar to readers of this newspaper and need not be rehearsed here. The crux is that the government appears to wish to weaken or erode the functional (if not legal) autonomy of the RBI, by imposing its will across a range of areas—including, judging by press reports and what I have been told by credible sources, an attempt to extract some of its “excess reserves” and put those into government coffers. Some reports suggest that the Union ministry of finance is eyeing ₹1-2 trillion of the RBI’s reserves, which is a not inconsiderable sum of money and which would be unprecedented in the modern history of the institution.


The reportage is murky, but some accounts suggest that the government has already invoked, or is preparing to invoke, Section 7, which permits it to direct the RBI to undertake specific actions in the national interest. This article has never been invoked, not even during the 1991 liberalization nor in the aftermath of the global financial crisis, and would be a clear red line for any central bank governor. This could well be the straw that breaks the camel’s back for Patel."


Read the full article here.

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