Rex is lex

Bankers can be forgiven for rejoicing at their unexpected good fortune. The Reserve Bank of India has been trying to suck liquidity out of the system and restrict banks' ability to lend on, but the banks are getting an unexpected windfall of about Rs 1,000 crore, as interest on the money deposited with the RBI to meet their cash reserve ratio requirements. The interest is a bonus because Parliament passed a law last year to stop paying interest on reserve money held with the central bank""thus falling in line with the international practice. But for reasons that have not been explained, this part of the new law has not been notified by the finance ministry even though it has received the President's assent. The RBI is therefore in the position of having to pay out interest on CRR balances, with retrospective effect, and the finance ministry needs to explain whether the failure to notify is an unintended oversight or deliberate.

The macro-economic impact of the interest to be paid out is not significant, since very much more has been impounded by the RBI than the interest that is now payable. Nor does the inter se re-distribution of profits between the RBI and the banks have any real meaning since both declare dividends that go substantially or wholly to the government (in the case of the listed banks, some dividends go to private shareholders). So it is not the management of monetary policy that is the big issue here, nor is government revenue a factor. All the more reason, then, that the failure to do the logical thing needs to be explained.

Failure to notify a part of an Act that has been passed by Parliament and then signed by the President, is not something that is to be treated lightly since it clearly amounts to playing ducks and drakes with the law-makers. There are not too many such instances that come to mind. The last example was probably the Delhi Rent Control Act, which was passed by Parliament when the National Democratic Alliance was in power. Since important parts of Delhi's commercial zones were controlled by a rent control law that made it near-impossible for landlords to evict tenants, and shopkeeper-tenants in prime areas like Connaught Place were paying rents as low as Rs 20 per month on properties worth several crore rupees and passing down such tenancies to their heirs, the Delhi Rent Control Act had sought to put an end to this. It prevented tenancies from being inheritable and laid down conditions under which tenants could be evicted after a reasonable period of time. This Bill was debated for years, with powerful tenants opposing it vociferously and others, including hapless landlords, arguing that the pro-tenant slant of the law as it existed was holding back investment in property. After acrimonious debate, the Bill finally became law and was signed by the President. The powerful shopkeeper-tenants, however, managed to have the last laugh since the new law never got notified. These shenanigans can at least be explained and understood in the context of substantial economic interests being at stake. The interest payable on CRR balances is curious especially because there is no such explanation possible.