The Reserve Bank of India on Wednesday announced that former governor Bimal Jalan will head an expert panel set up to examine the amount of reserves the central bank should hold, and whether it should transfer more to the government. The full list of members on the panel suggests a relatively balanced approach to a contentious issue that was at least partly responsible for the resignation of former RBI governor Urjit Patel amid unprecedented tensions between the government and the central bank.
The Jalan-led committee will look at the RBI’s Economic Capital Framework, which is the policy that dictates the need for the central bank to hold on to various “provisions, reserves and buffers”. The RBI earns money from the interest on government securities, the money it lends to other banks and any returns it may get from the foreign currency market. It then tends to move this income into various reserves meant to protect it from shocks and to ensure that it maintains its credibility as a lender of last resort and as the organisation best suited to protect the Indian economy. Any surplus is then transferred to the government.
There have been years in the past when the RBI has transferred its entire surplus to the government, citing adequate capital in its various reserves. But ever since its costs ballooned following demonetisation, it has transferred less. And now, as the poor economic policymaking of Prime Minister Narendra Modi’s government becomes apparent, the Centre has seemed determined to dip into the central bank’s resources in the hopes of using the money to reduce the size of the fiscal deficit, which had already reached 115% of the budgeted target in November. This move prompted much consternation from the central bank, with deputy governor Viral Acharya predicting “economic fire” if the Centre forced the RBI to part with its money.
Eventually the two sides agreed to set up a panel to look into the policy, but Patel’s resignation as RBI governor before it was even established suggested that there were still many sore points. However, the final composition of the committee suggests a semblance of balance: It will be headed by Bimal Jalan, a former RBI governor, who has spoken in the past of how the bank needs to listen to its primary stakeholder, the government. But Vice Chair Rakesh Mohan has been vocal about not letting the government have its way, insisting that the RBI’s capital holdings are needed to maintain operations and its credibility. Reports suggested the bank wanted Mohan to be chair. Even though it seems that the government has prevailed, his presence as well as that of a few others on the panel does indicate this will not be a pre-determined pro-government outcome.
The panel is also expected to submit its report within 90 days of its first meeting. Presuming that it takes the whole 90 days, as committees like this often do, that is likely to mean the decision will come too late for the government to derive any immediate electoral value from the report’s recommendations. That is most likely a good thing, as is the balance on the panel. The independence of India’s central bank is one of the key reasons that India’s economy can weather storms, and undermining it for short-term political gains would be to shoot oneself in the foot, just like the government seems to have done with demonetisation.
That is not to suggest that all is well between the RBI and the Centre – a number of issues that came up under Urjit Patel are still pending. But the composition of this panel, and some more measured remarks from new governor Shaktikanta Das offer hope that calmer minds will prevent the erosion in the independence of a crucial institution.