Economic capital framework: Govt for Jalan, RBI wants Mohan as panel head

The government has suggested former Reserve Bank of India (RBI) governor Bimal Jalan while the RBI has proposed the name of its former deputy governor Rakesh Mohan to chair a panel reviewing the economic capital framework (ECF) of the central bank.

“Both (Jalan and Mohan) have already expressed their views on recent issues. The discussions are ongoing,” a source aware of the development said.

While Mohan has been empathetic towards the view that the RBI’s autonomy needs to be maintained, Jalan has opined that the central bank is accountable to the government. Jalan and Mohan didn't respond to queries from Business Standard. The committee “to examine the ECF”, as decided by the RBI board in a meeting held on November 19, may likely have a deputy governor of the RBI and a representative from the government as members, the source said.

The brass of the finance ministry and the RBI are in touch to decide the members and terms of reference of the committee. Sources said the panel would not hold discussions on the revaluation reserves held by the RBI in its ‘currency and gold revaluation reserves’. It accounted for over 70 per cent of the RBI’s reserves of Rs 9.6 trillion at the end of June 2018.

“The unrealised gains in the revaluation accounts were never on table. The panel will mainly discuss how much provisioning is to be made by the RBI towards various possible risks. The provisioning done by the RBI towards various risks has 25 variables and assumptions,” said a source.

Jalan, who was RBI Governor between 1997 and 2003, had declined to comment on whether the government could dip into the contingency reserves of the RBI, but added that it would depend on the impact of the contingency fund on the rest of the financial sector and how urgent it was, in an interview to a daily.

“They have contingency fund in the sense that if there is requirement, then they can meet those requirements to finance the interest of the creditor. The contingency reserve is supposed to enable the RBI that without creating money, they can finance what is required,” Jalan had said in the interview.

Mohan, who was RBI’s deputy governor during 2002-04 and 2005-09, has briefly worked with Jalan in the central bank during his first tenure. In a three-part series of articles recently, Mohan articulated his views on why a central bank needed a strong balance sheet for critical functions of the economy.  

Mohan’s views were also cited in the speech delivered by RBI Deputy Governor Viral Acharya last month, which had created a furore in the government circles, asserting the importance of the RBI’s independence.

Mohan opined that “raiding the RBI’s capital” would create no new government revenue on a net basis over time, and “provides an illusion of free money in the short-term.” He further said that the transfer of surplus would “erode whatever confidence that exists in the government’s intention to practice fiscal prudence” and in the process the RBI will lose its credibility within the financial markets and public at large.

“What is also important is the erosion of central bank independence both in reality and perhaps, even more importantly, in optics,” Mohan had said.

He stressed upon the need to examine whether the RBI’s capital is ‘excessive’ and suggested a discussion around how such provision should the central bank make, towards various forms of risks, in its contingency reserves, before transferring the rest to the government as dividend.

The RBI needs adequate capital reserves for monetary policy operations, currency fluctuation, possible fall in value of bonds, sterilisation costs related to open-market operations, credit risks arising from the lender of last resort function and other risks from unexpected increase in its expenditure.

In an interview recently, Economic Affairs Secretary Subhash Chandra Garg had said the committee dealing with ECF would look into globally-adopted practices and determine how much provisions were to be made by the RBI towards possible areas of risks.