New Delhi (Agency): In 2018, the Reserve Bank of India (RBI) faced pressure from some quarters of the government to release between Rs 2-3 lakh crore from its balance sheet for spending in the run-up to general elections. This revelation comes from Viral Acharya, who served as the deputy governor of RBI at that time.
According to Acharya, this planned “raid” on the RBI’s balance sheet led to a tension between the central bank and the government. Officials even considered using a never-before-invoked law, Section 7 of the Reserve Bank of India Act, to force the bank into complying. The tension was part of a wider discussion on the financial independence of the RBI.
Acharya first discussed this issue during the AD Shroff Memorial Lecture in October 2018. In a new prelude to his book ‘Quest for Restoring Financial Stability in India,’ he describes the government’s proposal as “backdoor monetisation of the fiscal deficit by the central bank.”
He explained that in the years leading up to the demonetization of 2016, RBI had made record profit transfers to the government. However, the expense of printing new currency notes during demonetization reduced these transfers, thereby “intensifying” government demands for more funds ahead of the 2019 elections.
Acharya quit his post in June 2019, six months before the end of his term. Before him, RBI Governor Urjit Patel had also resigned in December 2018 amid reports of friction between the RBI and the government.
A committee under former governor Bimal Jalan was later formed to draw up a reasonable framework for future transfers from RBI to the government. Acharya pointed out that the government then made a large transfer in 2020, which he says could be justified due to the pandemic.
He concluded by saying that the RBI generates revenues mainly through seigniorage, or the profit made by printing money. Each year, the central bank saves some of this profit for financial stability purposes. Acharya criticized the government’s plan as short-sighted, aimed at benefiting the present government at the risk of future financial stability.
