‘RBI resisted Rs3-trn transfer attempt in 2018’

New Delhi: The Reserve Bank (RBI) resisted a raid planned by some in the government to extract Rs2-3 lakh crore from its balance sheet in 2018 to meet populist spending in run-up to general elections, Viral Acharya, who was Deputy Governor at RBI at that time, has written.

This apparently had led to differences between RBI and the government, which even contemplated invoking never-used Section 7 of the Reserve Bank of India Act to issue directions to the central bank.

Acharya who had first flagged the issue while delivering AD Shroff Memorial Lecture on October 26, 2018, in a fresh prelude to his book ‘Quest for Restoring Financial Stability in India’, called the exercise a ‘backdoor monetisation of the fiscal deficit by the central bank’. “Creative minds in the bureaucracy and the government devised a plan to transfer substantial sums accumulated by RBI during the tenure of previous governments to the current government’s account, he said in the prelude in the updated edition of his book first published in 2020.

RBI every year sets aside a part of its profit instead of giving it all to the government. In three years leading up to the 2016 demonetisation, the central bank made record profit transfers to the government, Acharya said. During the demonetisation year, the expense for currency printing reduced the transfers made to the Centre, resulting in intensifying the government’s demand ahead of the 2019 elections, he said.

Extracting more dividends from the RBI was in a way ‘back-door monetisation’ of fiscal deficit -- the difference between the revenue government generates and its expenditure. The deficit widened after disinvestment missed targets.

“Why cut populist expenditures in an election year, when the central bank balance sheet can be raided and surging fiscal deficits essentially monetised?” he wrote. Acharya quit in June 2019, six months before his three-year term as the deputy governor in-charge of the monetary policy, financial markets, financial stability and research. Prior to that, Urjit Patel had resigned as the governor of the central bank in December 2018. Though he cited personal reasons, the resignation came amid reports of the rift between the RBI and the government. His was a rare case of a serving governor leaving his job midway through his three-year term. Delivering the AD Shroff Memorial Lecture, Acharya had in October that year stated that: “Governments that do not respect central bank independence will sooner or later incur the wrath of the financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.” Acharya, who was deputy governor of RBI from January 23, 2017 to July 23, 2019, in the prelude wrote that the conditions in 2018 were “undoubtedly challenging” but not extreme, like the global financial crisis of 2008-09 or the US’s ‘taper tantrum’ of May-September 2013. The real catch was that a national election was due from April to May 2019, he wrote, adding, “some creative minds in the bureaucracy and the government conjured up an idea for generating Rs2-3 lakh crore, or equivalently $30-40 billion at the then exchange rate, for populist spending.”