RBI Resists Government Proposal to Raid Balance Sheet, Former Deputy Governor Reveals
According to former Reserve Bank of India (RBI) Deputy Governor Viral Acharya, the central bank resisted a government plan in 2018 to extract Rs 2-3 lakh crore from its balance sheet to finance populist spending leading up to the general elections. This resistance reportedly created tensions between the RBI and the government, resulting in discussions over invoking the never-used Section 7 of the Reserve Bank of India Act, which grants the government the power to issue directions to the central bank.
Acharya, in the prelude to his book ‘Quest for Restoring Financial Stability in India’, referred to the proposed exercise as a backdoor monetisation of the fiscal deficit by the central bank. The plan involved transferring substantial sums accumulated by the RBI during previous governments’ tenures to the present government’s account. These transfers were made possible by the RBI’s practice of setting aside a portion of its annual profit instead of giving it all to the government.
However, in the years leading up to the 2016 demonetisation, the central bank had made record profit transfers to the government. The expenses incurred during demonetisation, particularly for currency printing, reduced the transfers made to the Centre, intensifying the government’s demand for funds ahead of the 2019 elections. This demand for extracting more dividends from the RBI was seen as a way to back-door monetise the fiscal deficit, which had widened due to missed disinvestment targets.
Acharya questions the government’s decision to cut populist expenditures in an election year when the central bank’s balance sheet could be raided and the surging fiscal deficits could be essentially monetised. He highlights that such actions can have consequences, as governments that do not respect central bank independence may experience backlash from financial markets and economic turmoil.
Acharya resigned from his position in June 2019, six months before his three-year term as deputy governor was set to end. His resignation came amid reports of a rift between the RBI and the government. Initially, tensions were resolved when a committee led by former governor Bimal Jalan was established to create a framework for future transfers from the RBI’s balance sheets to the government. The government also marginalized those behind the plan to raid the RBI’s balance sheet. A significant transfer was eventually made in 2020 during the pandemic.
Overall, this revelation sheds light on the challenges faced by the RBI in maintaining its independence and resisting pressure from the government to finance short-term populist spending. It underscores the importance of an impartial central bank to ensure financial stability and regulatory effectiveness.
Keywords: RBI, government, balance sheet, Viral Acharya, fiscal deficit, demonetisation, elections, independence, financial stability.
