Issue of RBI’s Autonomy “Is the Reserve Bank independent? I don’t have a binary answer to this question” – D Subbarao “I am very independent. The RBI has full autonomy, I have taken the permission of my finance minister to tell you that” – Y V Reddy Issue of RBI’s Autonomy

Points to be covered RBI and its evolution You’re wrong! No, You’re Wrong! – the government and the central banker Sticking points PCA (Prompt Corrective Action) The February 12 circular Transfer of surplus/dividend The relationship so far? is India an outlier? How autonomous is RBI? Concerns/issues Way forward

RBI and It’s Evolution Commenced operations on 1st April 1935 The management of the functions are done by CBD The most important function is Monetary Policy MPFA (Monetary Policy Framework Agreement) and MPC (Monetary Policy Committee)

You’re wrong! No, You’re Wrong! Interest rates / Repo Rate In case of NBFC liquidity Forex reserves Controlling NPAs – no extraordinary measures Regulation of PSBs Payment Regulator

Sticking Points – PCA (Prompt Corrective Action) Risk Threshold 1 Risk Threshold 2 Risk Threshold 3 CAR/CRAR Lesser than 7.75% and greater or equal to 5.125% Lesser than 5.125% and greater or equal to 3.625% Lesser than 3.625% NPA (Asset Quality) Lesser than 9% and greater or equal to 6% Lesser than 9% and greater or equal to 12% Greater than 12% Profitability (RoA) Negative ROA for 2 consecutive years Negative ROA for 3 consecutive years Negative ROA for 4 consecutive years Leverage Greater than 25 times the Tier 1 capital Greater than 28.6 times the Tier 1 capital

Sticking Points – PCA (Prompt Corrective Action)

Sticking Points – PCA (Prompt Corrective Action) NII NPAs (as % of loans) Corporation Bank +51% 195 bps IDBI +17% 667 bps overall +114% 195 to 667 bps

Sticking Points – February Circular

Sticking Points – Contingency Issue RBI – will incur expenditure and will also make earnings Under the RBI Act, 1934 (section 47), the central bank is required to pay the government its surplus after making provisions for Bad and doubtful debts Depreciation in assets Contribution to staff and superannuation fund For all matters for which provisions are to be made by or under the Act or that are usually provided by bankers Of the surplus certain amount will be transferred to the government AY12 – 37. 2% AY13 – 53.4% Since then 99.99%

Sticking Points – Contingency Issue

RBI Earnings Expenditure - Printing and Distribution of notes - Foreign currency assets - Lending to the banks - Seigniorage - Interest on G-Sec Expenditure - Printing and Distribution of notes - Expenditure related to staff - Commission to the banks

Relations between the Government & Central bank In case of India Owned by the government Members to CBD are appointed and removed by the government US It is an independent agency Is audited annually by an outside auditor Is accountable to the US Congress and the people Bank of England Owned by UK government Parliament gives specific goals and responsibilities Is free from day to day interference of the government Answerable to Parliament and the people Japan Legal mandate to maintain price stability Parliamentarians appoint the central bank governor or board members Government cannot remove the governor and board members China Serves the Communist Party and its objectives

How autonomous/independent is RBI? Appointments/removals Policy making decisions Section 7 of RBI Act empowers the government to consult and give instructions to the governor to act on certain issues that the government considers serious and of public interest (this section has never been used)

Issues / Concerns Attack on an institution Right worries but wrong time RBIs credibility will be hit Economy is at a fragile state Compartmentalization of Fiscal policy and Monetary Policy Why in such a hurry?

Way Forward Extensive consultations Transparency in consultations More freedom to RBI in terms of regulating the PSBs, deciding interest rates etc Smoother dividend distribution rather than staggered one Lesser interference by DFS (Department of Financial Services)