Raghuram Rajan tells RBI to leverage its 'Rs 8-9 lakh crore' capital against Coronavirus

Former RBI Goverr Raghuram Rajan on Friday spoke in detail about Coronavirus pandemic that is reigning across world, having killed over 100,000 people and infected a total of 1.7 million worldwide. Speaking to a news channel, Rajan focused on behavioural changes within realm of ecomic activity, response of various governments, response of Indian government, and impact COVID-19 may have on India along various terms of time.

Raghuram Rajan's view on what RBI can do

Among se, apart from his recommendation that poor, unsalaried earners and elderly were groups that needed immediate support during times of lockdown, an eyecatching view comprised his thoughts on role of central bank, which under current Goverr Shaktikanta Das has been responsible for one of three heline moves in Modi government's response to Coronavirus.

While Rajan cautioned on imposition of moratoria, such as 3-months moratorium that has been afforded upon all term loans by Reserve Bank, by highlighting underlying assumption that person to whom money is owed is richer than one who is to pay it back, of greater interest was his take on utilisation of RBI's own surplus capital reserves - a figure running into Rs 9 lakh crore which h become subject of intense ecomic and political debate at around end of 2018, during 'tension' between n Urjit Patel-led RBI and central government.

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'Need RBI to be AAA-rated'

Weighing in on how RBI's equity can be deployed at a time like this, Rajan said following:

" RBI's equity has been a matter of debate over time. When I was Goverr re was a lot of talk about paying it in one big wave to government - I said 'you own this, you own RBI, RBI is a wholly-owned subsidiary of government - this is an asset of government. All you have to do is accounting and show that you have an asset that is worth Rs 8-9 lakh crore that offsets some of your liabilities, you don't actually need it to be paid. Because it's very harsh on RBI to pay it out."

Continuing in vein of capital holding greater significance if retained with RBI and t be viewed in liquid terms, he ded, "But more importantly, you need at least one entity in this country which has AAA rating, which in times of trouble can raise financing country needs and can serve as a viable entity that investors can trust, and for that it needs to be well-capitalised, and that was my second argument for RBI being capitalised as a AAA rating entity."

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"Fortunately, that asset can serve as a source of strength as RBI expands its balance sheet and essentially serves as an intermediary between ordinary depositor and rest of ecomy when credit risks have gone up hugely. So that kind of equity has to be basis behind which he RBI w can step up and fill gaps left by financial system," he explained.

Summing up his views on matter, Raghuram Rajan said, " idea was t so much that we want this so we can feel good about this but we want this so that we can use it in b times, to offset fact that our financial sector at those times and government at those times will be much less well-capitalised and much less able to raise money in market. RBI can put its balance sheet to work. And that's what I'm vocating w, RBI should put its balance sheet to work in mediating between public markets and investors and kind of firms that need money today, and this is kind of way it can do it despite t having direct expertise." 

Jalan Committee's recommendations and RBI's Ecomic Capital Framework

In August 2019, RBI h accepted recommendations of a committee that h been formed in December 2018 under chairmanship of former RBI Goverr Dr Bimal Jalan. That committee h said following as part of its recommendations, among or things:

" Committee’s recommendations were guided by fact that RBI forms primary bulwark for monetary, financial and external stability. Hence, resilience of RBI needs to be commensurate with its public policy objectives and must be maintained above level of peer central banks as would be expected of a central bank of one of fastest-growing large ecomies of world." This h come even as RBI h transferred Rs 1.76 lakh crore to government of India as per revised Ecomic Capital Framework (ECF) it h opted consequent to Jalan committee's recommendations.

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