Unromantic Love between Central Banks & Governments

WHAT IS CENTRAL BANK? The independent national institution responsible for printing and distribution of money and credit. It controls the commercial banking operations of any economy Provides Banking and Financial Services to the government It is responsible for the monetary policy formulation and implementation GOALS Control Inflation Keep Unemployment rate low Stabilise the nation’s currency

HISTORY OF CENTRAL BANKS Sveriges Riksbank, the first central bank was established in 1668. Few decades later, in 1694, the most popular central bank came into existence, Bank of England. Central Banks were lenders to the government who funded the government objectives. Default of monarchs or government led to falling credibility of authorities and failure of financial systems. This system allowed to stabilise currency, borrow at lower rates to flourish the economy. In 19th century, capitalism plagued with financial panics reducing creditworthiness of private banks. This system was being accepted widely by different countries by pegging currency and gold In 1907, USA again hit with another crisis known as KnickerBocker Crisis resolving it led to creation of US Fed in 1913.

MAJOR CENTRAL BANKS ACROSS WORLD Federal Reserve System European Central Bank People’s Bank of China Bank of Japan Bank of England Reserve Bank of India Banco Central do Brasil Bank of Canada Central Bank of Russia Reserve Bank of Australia

RELATIONSHIP BETWEEN CENTRAL BANKS AND GOVERNMENT One common objective for both of them is economic development and well-being of the nation. Government plays a key role in facilitating the development prospects by building required infrastructure and supporting through various aids. The central bank acts as the lender of last resort for funds, especially for developing nations which have lingering deficits. Central Bank, though independent and legal monopoly, is under the purview of government in one or other form. They mutually respect their domains and try to sustain the growth of economy.

THE UNROMANTIC LOVE! Democratic setup & Political Reasons Most of the leading nations elect their governments democratically. So, ruling authorities have to prove themselves being a better option. Central bank’s mandate is to curb inflation rates and keep economy under control.

INDIAN CENTRAL BANK - RBI Founded on April 1st under RBI Act, 1934. Nationalised in 1949, since then completely owned by Government of India. Preamble of RBI states its basic functions. 1. Monetary Supply 2. Keep reserves for monetary stability 3. Operate the currency and credit system During 1960-70, banks crashed which led to nationalising of many banks. RBI played a key role in controlling and supporting these banks. Further nationalisation of banks increased the regulation power of RBI over banks and became a bigger player in the economic development of India Post LPG, need for private banking sector emerged leading to setup in 1993.

AUTONOMY OF RBI It can be looked into as 4 phases Pre Independence (1935-1948) Post Independence ( 1948 - 1969) Nationalisation ( 1969-1991) Economic Liberalisation ( 1991 -2010)

IN THE LAST DECADE.. 2010 - Setting up of Financial Stability and Development Council 2012 - RBI Governor Subbarao & Fin Min Chidambaram. Push to reduce repo rates 2013 - Recommendations by Financial Services Legislative Reforms Commission 2016 - Technical Advisory Committee replaced by Monetary Policy Committee, RBI Guv doesnt have veto power. Financial Sector Search and Recruitment Committee, headed by Cabinet Secretary Tried to separate debt management function from RBI, though not implemented 2017 - Proposal for FRDI bill 2018 - Expansion of FSDC members to 8 out of 12 Separation of Payment Regulatory Authority headed by bureaucratic chairmanship

RECENT TUSSLE RBI Governor Urjit Patel resigns. Why? Government and RBI were in a great battle. The government was fierceful in pushing its recommendations. Easing norms of PCA to increase the credit lending capacity of 11 PSBs which are under PCA Threat to invoke section - 7 of the RBI Act Transfer of excess capital reserves with RBI to Government 9.59 lakh crores, which is 28% of its total assets in contrast to the global average of 16%. The negotiations ended up in a temporary respite and with some wounds for RBI

Thankyou - K A Bharadwaj