Covid Has Shifted Policy Efficacy Away From RBI

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.