Could not sleep so thought I would share my views on Central Bank Independence. My background is in Economics and I have studied financial systems across the world at some length as its an area of interest.disha wrote:+72.chetak wrote: Reserves belong to the shareholders and not to the company (RBI).
the reserves truly belong to the GoI and ultimately to the public.
This is the print article on RBI https://theprint.in/opinion/central-ban ... st/283129/what exactly was/is its risk universe and what are the mitigations that it seeks to deploy, does anyone actually know
(Looks like Coupta got some chabi or trying to create a modicum of balance now for a reason & to be used later)
On the forex-rupee reservesAre the reserves excessive?
Internationally, there is no consensus on central bank reserves. Some central banks, such as the RBI, hold large reserves. In some countries (like Israel, Chile, Thailand), they even run with negative capital. Most others are in between. Commercial banks require capital to create faith in their soundness so that there are no runs on them. Central banks do not face such threats. For the RBI, maintaining reserves to ensure a good rating also does not make sense. A central bank’s credit rating is not distinct from that of the country.
AndFrom the total reserves, about 70 per cent (Rs 6.92 lakh crore approximately) are in the Currency and Gold Revaluation Account (CGRA). This account mainly covers revaluation losses on foreign currency securities. The main risk with these securities is that of rupee appreciation. The RBI books profits and losses in rupees. When rupee appreciates, foreign currency assets become less valuable in rupee terms, leading to losses for the RBI. The RBI makes profits when the rupee depreciates.
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The RBI reserves are sufficient to absorb about 36 per cent appreciation – that is, rupee going to about 53 per dollar. The RBI is keeping reserves for an extremely low probability event.
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What Modi government can do is evolve this framework and update the RBI act. Since this can be called as a money bill, it will not need a nod in RS.This is also political because central banks, like other public agencies, have an incentive to “build an empire”, sometimes even at the cost of public interest. This is why, in other countries, the framework is usually given in the law or is in an agreement between the central bank and the government. The decision about central bank surplus cannot be left only to the central bankers.
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A sustainable solution would involve including the framework for surplus and reserves in the RBI Act ... The framework should ensure optimal utilisation of surplus income – for building reserves and for fiscal purposes.
The act can be called "Managing surplus money and framework of money management by RBI".
In the meantime, for siding with Bakistan, CONgoons should be split into 2/3rd and 1/3rd. The rump CONgoons can be called as Congress (S) or Congress (C) (for Sonia/Chornia) and the larger set should call themselves BNC (Bharatiya National Congress). Gandhi's dream remains to be fulfilled.
1. Independence : I believe that Central Banks must have independence to set monetary policy and an explict inflation target as its benchmark. This ensures that all government's natural desire for fiscal expansion does not lead to run away inflation as central banks can counter that through monetary policy. Monetary policy's main aim should be inflation targeting not growth targeting . This is especially important in a developing economy like India as inflation hits the poorest. Whenever central banks have tried to target growth instead of inflation it has lead to disaster. Western central banks pumped money into the system leading to the 2008 financial crisis. After the crisis they bailed out banks and pumped even more money into the system to keep asset prices artificially inflated. This lead to more than a decade long financial repression of the masses while the elite got richer. This included all asset owning classes. So I strongly endorse central bank independence in monetary policy.
2. Reserves : RBI reserves are 10 lac crores and its assets are 36 lac crores. Thus it holds about 28% reserves. Central Banks around the world have different legal structures. The Fed for example is semi private. However the RBI by statute is part of the Government of India and hence its credit is same as India's sovereign credit. Therefore it does not need high reserves. Even private investment banks - the riskiest category of financial institutions across the world hold about 8% of assets as capital (including reserves). There is no case for RBI to hold anything above 8%. In fact 5 % would be more than enough. Furthermore, RBI's profits are a direct consequence of economic activity in India especially INR weakening. Therefore it must return all its profits to the people of India ie the Government of India. A law must be passed that fixes RBI's capital adequacy at 5% or at max 8%. All surplus in addition to that must be returned to GOI.
