Context: RBI’s autonomy and monetary tools are no longer all that relevant to recovery from our covid shock. India needs a fiscal push.
Questions over RBI’s autonomy and monetary tools
Suspicion of transferring of Contingency Buffer to the government: In August 2019, RBI gave Centre Rs 1.76 trillion for 2018-19, up from Rs 50,000 crore the previous year.
In 2021, RBI declared a transfer of Rs 99,122 crore for the last three quarters of fiscal 2020-21.
In 2019, the Bimal Jalan Committee recommended that RBI must keep all its asset revaluation gains but retain its realized earnings only to the extent needed to maintain its risk buffer in a range of 5.5-6.5% of total assets.
Disputes and differences: Leading to the exit of former governor Urjit Patel and deputy governor Viral Acharya, who warned of “the wrath of financial markets” over a monetary authority that lacked liberty.
Apparent limits of RBI’s powers: For e.g. in Centre’s decision to scrap high-value currency notes.
Efficacy tilts in favour of fiscal over monetary policy amidst pandemic: Demand is in need of aid, not just credit flows, and RBI’s key monetary tools are best suited for calm conditions and not Keynesian economics environment.
Way forward:
What matters most for a revival right now is not the allocation of credit but the ability of the government to quell infections, boost healthcare, offer stimulus and move money.
So, rework this year’s Union budget and don’t over-rely on RBI.