Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday said that the suggestion in the Economic Survey for 2015-16 to the effect that the central bank should use its capital and recapitalise public sector banks (PSBs) was not a good one, reports fe Bureau in Mumbai. “Whoever wrote that piece does not understand monetary policy economics or the monetary balance sheet of banks,” the governor said, pointing out that the RBI’s balance sheet was different from that of the banks.
Rajan clarified that he did not intend to criticise the government but only the author of the report.
“The author of the piece has not understood monetary economics that well and I would be happy to teach them,” he quipped.
Rajan explained that, say, the RBI monetises close to Rs 2 lakh crore, it could add Rs 2 lakh crore to the size of the balance sheet. “However, if we give half of it to the government, that means there is only Rs 1 lakh crore left to buy government bonds,” the governor said, adding that the bonds will have to be sold in the market.
“So what we are saying is given those constraints, any extra money we give to the government will basically reduce our ability to buy government bonds directly,” Rajan said.
According to the Economic Survey 2015-16, to address the economy’s critical short-term challenge of public sector banks (PSBs) and some large corporates having highly stressed balance sheets, the Reserve Bank of India (RBI) could redeploy the capital at its disposal for recapitalising the PSBs.
Noting that the RBI is an outlier among the community of central banks with a high shareholder equity-asset ratio of 32%, the survey’s authors recommended that without compromising on its need to keep buffer capital to cope with eventualities like perils to its forex reserves from the rupee’s volatility, the RBI could reallocate a portion of its capital to the shareholder banks.
It had also said that the RBI is next only to Norway’s central bank in holding a high portion of equity (capital, retained earnings and contingencies) with itself — around Rs 8 lakh crore now, including unrealised gains.