Government and RBI should address differences between them: Y V Reddy – The Economic Times

The RBI sop was abused by banks and industry giving rise to NPAs, according to former RBI governor Y V Reddy.
The government pushed regulatory forebearance post the global financial crisis of 2008 may be the root cause of the NPA mess. The RBI sop was abused by banks and industry giving rise to NPAs, according to former RBI governor Y V Reddy. But as India is going to be an important player in the global economy, he called for the need for the government and RBI to address the root causes of the recent standoff between them.

“ …It appears that the fiscal stimulus was, in fact, fiscal deterioration (since the increase was in recurring revenue expenditures); the monetary stimulus lasted longer than needed” said Reddy in a lecture at the Gokhale Institute of Politics and Economics “The regulatory forbearance was taken undue advantage of by the banks and industry resulting in restructured loans and large NPAs. The spur in lending to infrastructure at this time also led to large NPAs. All indications are that RBI was constrained by Government in timely withdrawal of stimulus”

The issue is significant in the context of tensions between the government and the Reserve Bank, essentially on the issue of transfer of RBI’s surplus income, that have been aired in public culminating in the resignation of governor Urjit Patel.

Defending the Reserve Bank’s reservation on transferring high amounts to the government, Reddy highlighted that the spirit of limit on ways and means arrangement under fiscal management legislation has been compromised. “The immediate fiscal needs seem to take precedence over a renewed assessment of the capital needs of RBI” he said.

Coordination between government and central banks to manage the crisis was global and India was no exception then. But now the issue of governance in central banking is being widely debated globally. U.S. President Donald Trump has criticised the Federal Reserve for raising interest rates. European Central Bank president Mario Draghi recently raised the issue of the threat to central banks’ independence from governments stating that the “ECB mandate does not involve financing government’s deficit”. President Erdogan accused the Central Bank of a “traitorous” reluctance to lower interest rates.

Reddy suggested that in a globally integrated world India will be increasingly important to the world. It also has more opportunities than ever before in the area of financial sector for our dominance with India’s strengths in technology and skilled manpower. “To take advantage of it, Government of India in partnership with Reserve Bank of India should address the root causes of the recent standoff between them” Reddy said.

via Government and RBI should address differences between them: Y V Reddy – The Economic Times

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s