Fri. Mar 29th, 2024
Raghuram-Rajan-Currency-freefall

Former Reserve Bank of India (RBI) governor, Raghuram Rajan, has cautioned that transfer of excess reserve to the government might lower the ratings of the central bank.

Lowering of ratings from ‘AAA’ would make borrowings costlier and have further implications on the economy.

Raghuram was asked if the transfer of excess reserve to the government could downgrade the ratings of the RBI. He said, “It could… it depends on how much. It may not be an issue now… may be an issue at some point of time. That’s one concern.”

“We are ‘Baa’ country. We are barely investment grade. Sometimes, we need to undertake international transactions which require a really high credit rating. For example swap, we did in 2013. So, for that, we need an unimpeachable balance sheet. Why don’t we keep the RBI as an unimpeachable balance sheet with AAA credit rating that requires a certain amount of equity,” he said.

Rajan says that the profit of the central bank of India largely comes from the devaluation of the Indian currency. The RBI, keeping a portion for the contingency reserves, usually pays the entire profit.

He added, “RBI can pay profit and not whatever it holds for contingency reserves for movement up and down. For example, rupee that depreciated could also strengthen…so we should accommodate for that”.

Contradictory to his views, James McCormack, Managing Director and Global Head of the sovereign and supranational group, Fitch Ratings, in an interview with ET last month, said, “We see that happen in a lot of countries. It is not something unique to India. Central banks are ultimately owned by their sovereigns. So, when they generate profits, some countries have regulations by which the central bank is obligated to transfer profits.”

James added “It is not unusual for central banks to transfer a part of their profits on an ongoing basis or at a point in time to the fiscal accounts if the government so desires. It can be a part of fiscal revenue because central banking is inherently profitable.”

When asked if such transfers would impact government finances and help from the ratings perspective, James said, “I am not really sure because I do not know the magnitude of transfer that they are talking about. But it is not going to radically transform the fiscal position in a meaningful way. It’s not a very big issue from the rating perspective. But it is understandable why it is newsworthy here. This is because both institutions are sensitive to any change in these relations. “

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