MUMBAI: Former Reserve Bank of India (RBI) governor Y.V. Reddy on Friday said the government, which has a weak fiscal balance sheet, needs to ensure that at least the central bank’s balance sheet remains strong. The government has the power to exercise claims over RBI reserves but the way it exercises this right gives signals to the market and influences public opinion, he said.
“The government may like to assure the markets that its central bank has the capital to meet contingencies that may arise without depending on governments," said Reddy in a speech titled Central Banking in India: Retrospect and Prospect at the Kale Memorial Lecture at Gokhale Institute of Politics and Economics on Friday.
"There is merit in keeping at least the central bank’s balance sheet strong if the government’s fiscal balance sheet is weak. But substantively, it is the judgement of government that prevails on the adequacy issues, though procedurally that of the board," he added.
Reddy’s speech comes ahead of the 18 February RBI board meeting, which is slated to take a call on the question of interim dividend.
The central bank is being asked to pay to the government as dividend the amounts that have been transferred to its reserves in the previous two years. The government expects ₹28,000 crore as dividend, economic affairs secretary Subhash Chandra Garg had said earlier this month.
The government has so far received ₹40,000 crore from RBI during 2018-19, compared to ₹50,000 crore, including Rs10,000 crore interim dividend, last fiscal.
Reddy defended the central bank’s reservations on transferring high amounts to the government. According to him, the spirit of limit on the ways and means arrangement under fiscal management legislation has been compromised. “The immediate fiscal needs seem to take precedence over a renewed assessment of the capital needs of RBI."
According to the former RBI governor, globally, the issue of governance in central banking is being widely debated. In this context, the future of central banking in India will depend on the manner in which current concerns relating to fiscal management, public sector ownership, external sector balance and coordination functions are resolved by the government, he said.