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Indian central bank hands Modi government $24.8bn windfall

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The Reserve Bank of India has approved the transfer of $24.8bn in dividends and “surplus capital” to the government in an unprecedented payout that will help Narendra Modi shore up the country’s fragile public finances but intensify concerns over the central bank’s independence.

It follows last year’s bitter public confrontation between the prime minister’s administration and Urjit Patel, former RBI governor, whose resistance to what he considered an attempted raid on the RBI coffers by the government ultimately cost him his job.

“The central bank is losing its functional autonomy and essentially becoming a piggy bank for the government,” said Vivek Dehejia, a Carleton University economics professor, who has closely followed the battle over the reserve issue.

“The medium and long-term consequences are a loss of the central bank’s credibility,” he said. “Investors looking at India will say the central bank is totally under the control of the government. This can’t possibly be good for the economy.”

In a statement on Monday evening, the RBI said it had approved the transfer to the government of its entire $17.3bn net income from the just concluded financial year, as well as an additional $7.4bn in excess reserves.

The RBI said the transfer was consistent with a new economic capital framework that it had just adopted that would ensure its resilience, “as would be expected of a central bank of one of the fastest growing large economies in the world”.

Prior to the transfer, the RBI’s available realised equity stood at 6.8 per cent of the balance sheet, the RBI press release said.

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But the new framework, proposed by a committee led by former RBI governor Bimal Jalan and approved on Monday, advised the RBI to retain a contingent risk buffer of 5.5 per cent to 6.5 per cent of its balance sheet.

The RBI decided to maintain the realised equity at the low end of the range, 5.5 per cent of range of the proposed contingent risk buffer, paving the way for the transfer of $7.2bn in excess reserves to the government.

The RBI also agreed to transfer its entire net income for the last financial year to the government, the press release said.

Tensions over the use of RBI reserves exploded into public view in October when the then deputy central bank governor Viral Acharya gave a speech warning of “potentially catastrophic consequences” of New Delhi’s intensifying efforts to influence RBI policy, particularly its desire to commandeer a large chunk of RBI reserves.

Two months later, Mr Patel resigned, paving the way for Mr Modi’s government to appoint a more accommodating figure, Shaktikanta Das. Mr Acharya left the bank in July to return to academia in the US.

The announcement of the transfer comes as Mr Modi’s government is facing mounting pressure To take measures to stimulate the faltering economy after four consecutive quarters of decelerating growth. Questions have also been raised about the likelihood that it will be able to meet its reduced fiscal deficit target.

On one hand, New Delhi has made vast spending commitments for its ambitious social welfare and income support programs. But tax revenues are falling short of projections as the economy falters.

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However, the infusion of cash from the RBI will help plug the financial gap and help finance new stimulus measures in the coming days.

“This is a fiscal windfall of unprecedented proportions for the government of India,” said Saurabh Mukherjea, of Marcellus Investment Managers. “It gives them fiscal breathing room at a time when they really were struggling with tax collections in the current financial year.

“We are heading for a pump priming of the economy, using this unprecedented windfall,” he said.

Additional reporting by Jyotsna Singh

Via Financial Times

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