1. 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

2. 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

3. 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)

4. 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

5. 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

6. Sticking Points – PCA (Prompt Corrective Action)

7. 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

8. Sticking Points – February Circular

9. 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%

10. Sticking Points – Contingency Issue

11. 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

12. 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

13. 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)

14. 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?

15. 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)