Keep RBI’s balance sheet strong: YV Reddy – The Hindu BusinessLine

There is merit in keeping at least the RBI’s balance sheet strong if the government’s fiscal balance sheet is weak, according to YV Reddy, former governor of the central bank.

Reddy was referring to the stand taken by the government last year that the existing levels of RBI reserves are in excess of the requirement and, therefore, could be legitimately claimed for use by the government.

The RBI, on the other hand, took the view that the reserves are not in excess and that even if they were in excess, the purpose will be served over the years by sticking to the legal requirement of transferring to its reserves a portion of the current surplus of income over expenditure till the reserves need to be augmented.

Speaking at the Kale Memorial Lecture in Pune, Reddy said the use of reserves accumulated in the past will have to consider factors such as the macroeconomic implications of such transfers, in particular, the monetary implications that are likely to be expansive; and the issues of inter-generational equity since the reserves have been accumulated as insurance for the future.

PCA framework

Referring to the government’s contention that growth has been affected by stringent measures such as the prompt corrective action invoked against banks, Reddy observed that there can be genuine concerns of the government, but governments generally “persuade the regulator but not direct it in such matters”.

“Obviously, the government is tilting in favour of their own regulated entities who failed to convince the regulator in the matter, though the RBI is the agent of the government fully equipped to take a view on the matter.

“In a manner, this dilutes both the autonomy and accountability of RBI,” said the former Governor.

Reddy felt that perhaps the government intervened in IL&FS since both Life Insurance Corporation of India (LIC) and State Bank of India (SBI) owned by it are large stake holders in IL&FS, and also because many infrastructure projects are involved.

“In any case, the RBI should be concerned at the risk assessment capabilities of public sector giants such as LIC and SBI that allowed this to happen while having large a stake in IL&FS,” explained Reddy.

SME lending

Referring to the government seeking a policy and procedure from the RBI to facilitate lending liberally, primarily to small and medium industries, Reddy cautioned that any extraordinary push will jeopardise depositors’ interest or induce systemic instability.

via Keep RBI’s balance sheet strong: YV Reddy – The Hindu BusinessLine

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