Covid has shifted policy efficacy away from RBI
PremiumWhile we await details of its latest payout to the Centre, RBI’s autonomy and monetary tools are no longer all that relevant to a recovery from our covid shock. India needs a fiscal push
The pandemic has shifted concern away from the annual surplus that our central bank shares with the government, after it deducts the year’s expenses from its income, to how well New Delhi spends public money. On Friday, the Reserve Bank of India (RBI) declared a transfer of ₹99,122 crore to its owner for the last three quarters of fiscal 2020-21, having adopted an April-March cycle. Stretched to four quarters, that would amount to more than twice the payout it made the year earlier, ended June 2020. Yet, given the acute need of funds for our health emergency, it can’t help the Centre much. The irony here is the bonanza turned over by RBI just before covid struck. In August 2019, it gave the Centre ₹1.76 trillion for 2018-19, up from ₹50,000 crore the previous year. This hike had raised suspicions of RBI being pressed by the Centre to part with the money it usually held back as ‘provisions’ (marked as an expense) for its contingency buffer against various risks. The very autonomy of RBI was seen at threat, back then, with a dispute over the issue said to have spurred the exit of former governor Urjit Patel (in late 2018). Viral Acharya, a deputy governor who left soon after, openly warned of “the wrath of financial markets" over a monetary authority that lacked liberty. Today, RBI’s buffer still matters, as does its freedom, but covid has changed the context.
Our central bank has never explicitly been granted independence, but a free hand for RBI was implicit in the official mandate it was given in 2016 to ensure price stability. The limits of its power, however, were soon apparent in the Centre’s decision to scrap high-value currency notes and its demand for enlarged RBI dividends to plug fiscal deficits. An uproar over an attempted ‘raid’ of RBI vaults was settled by a formula devised in 2019 by a panel headed by former governor Bimal Jalan. Under it, RBI must keep all its asset revaluation gains, but retain its realized earnings only to the extent needed to maintain its risk buffer in a range of 5.5-6.5% of total assets. RBI went by the lower end, found that its fund had more than 5.5% of its assets of ₹41 trillion on 30 June 2019, and added the excess reserves to that year’s payout, a 30% lump of it. One year later, its balance sheet had expanded to ₹53.4 trillion and so it had to refill its safety vault by ₹73,615 crore, which left less money for central coffers. How did RBI manage to pay almost a trillion this year? Its numbers are keenly awaited.
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What has redeemed the Centre’s clunky push for RBI control—perhaps perversely—is an efficacy tilt in favour of fiscal over monetary policy as a salve for India’s covid-stricken economy. Demand is in need of aid, not just credit flows. Much money could stay stuck in a stupor of anxiety. Even as Keynesian economics and its talk of motives gain in relevance, RBI’s key monetary tools, best suited for calm conditions, have lost their edge. What matters most for a revival right now is not the allocation of credit, but the ability of New Delhi to quell infections, boost healthcare, offer stimulus and move money—not just directly, but optimally too. If we are to haul our economy out of a shock whose waves of paralysis could yield spasms of hysteresis, public spending needs to be both substantial and spot on. So rework this year’s Union budget. And don’t over-rely on RBI.
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