RBI vs Govt fight: How a ‘joint family’ in the past saved the day for central bank

By: |
Published: November 19, 2018 11:59:20 AM

Even as the government is being currently seen as eyeing RBI’s surplus reserves, but 25 years back, it bailed out the same institution from a prospective loss, perhaps first time in its history, using its own budget.

The RBI was the guarantor on these foreign currency deposits.

Even as the government is being currently seen as eyeing RBI’s surplus reserves, but 25 years back, it bailed out the same institution from a prospective loss, perhaps first time in its history, using its own budget. The story of “joint family approach” from the past is creating enough buzz today especially amid the ongoing tussle between both.

The story goes back to June 1994 when the central bank realised that it hasn’t accounted for the exchange loss liability in its balance sheet on account of Foreign Currency Non-Repatriable Deposit Scheme or FCNR-A issued by banks since 1975. “RBI’s balance sheet was going to be in the red. It could have been an embarrassing position,” The Indian Express reported citing an unidentified source. The scheme was introduced by the banks, following a push by the government to finance current account deficit, at rates higher the local deposits. The FCNR-A deposits surged in the 1980s.

The central bank was the guarantor on these foreign currency deposits. However, RBI’s decision lacked robust rationale and was based around these weak points: when the rupee depreciates, the dollars adding to the foreign currency assets will get revalued, helping in meeting losses during the repayment of principal. Similarly, the interest due on the FCNR-A deposits would be met through earnings on the dollars invested in foreign countries.

As long as the dollars remained with the central bank, it continued to be a no loss, no gain scheme. However, India soon was struck by a balance of payments crisis in the later 1980s. The foreign exchange depleted fast and even the assets worth $1.1 billion in 1991 represented dollars sold forward under a separate swap arrangement with SBI, The Indian Express reported citing unidentified sources. Till 1994, the losses were met by the Exchange Equalisation Account and the Contingency Reserve of the RBI. However, both the reserves got completely depleted by 1994. Soon, RBI was not left with any source for providing for exchange losses on $10-billion worth dollar liabilities under the foreign currency deposit scheme. As the exchange rate nearly doubled at Rs 31.37, the  total loss added up to Rs 1,500 crore.

It was a time when  former prime minister Manmohan Singh was the finance minister, C Rangarajan the RBI Governor and Shankar Acharya the Chief Economic Advisor. “I think there was a board meeting in Bangalore where the top brass had huddled for a solution. And an ingenious solution was worked out between Janaki Kathpalia in the ministry of finance’s budget division and R Janakiraman, deputy governor in RBI. The RBI’s books were kept on actual basis, the government’s on a cash basis,” The Indian Express reported citing a former RBI board member.

Since 1994, it was decided that all losses on foreign deposit scheme would be met by the government on a cash basis, i.e. on the actual dollar sold during the year under the scheme so that the banks meet their dollar outflows, he added.

The government of the time provided for Rs 365 crore for taking on its account books the RBI liability due to exchange losses, in Budget 1994-95.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition
FinancialExpress_1x1_Imp_Desktop