RESERVE BANK OF INDIA INDEPENDENT FALCON OR CAGED
RESERVE BANK OF INDIA – INDEPENDENT FALCON OR CAGED PARROT IITM, New Delhi, Nov 16, 2018 Sanjeev S. Ahluwalia ahluss@gmail. com; https: //ahlu-inidia
01 -11 -2020 Sanjeev S Ahluwalia ORF 2 Economics History Sociology Pol Eco analysis Financial Mgmt. Political Science Dadabhoi Naroji Alan Greenspan Ashish Nandy Douglass North John Maynard Keynes Daron Acemoglu & James A. Robinson
01 -11 -2020 Sanjeev S Ahluwalia ORF • Behavioural Science • Incentives • Effectiveness • Efficiency • Legacy benefits & costs • Culture • Informal Norms Econ Pol. Scien ce HS FM 3 • State Architecture • Governance systems • Geo-politics • Value of money • Allocation of capital • Sustainable business
01 -11 -2020 Sanjeev S Ahluwalia ORF 4 History/Sociology/Anthropology (HAS) Ø Warren Hastings Gov. Gen. voices need for a government bank. ØSafety of receipts and ease of payments ØCommon rates for conversion to Murshidabad Sicca ØEnsure adequate availability of currency locally (EIC collections<expenses) ØIssues: Private or public ownership; management control? Ø 1806 : Bank of Bengal set up as an EIC owned bank Ø 1807: Robert Richards suggests a General Bank – Joint ownership Government + Public (2: 1 ratio for shares); but not for financing Government. Rejected by Directors of the EIC who feared needing to finance government ØSOURCE OF FEAR: 1797 William Pitt (younger) had directed the Bank of England to reserve its gold for fighting the French – led to a run on the BOE. Ø 1836: British businessmen propose a “Great Bank for British India” Government funded to use British surpluses productively for business. REJECTED by government.
01 -11 -2020 Sanjeev S Ahluwalia ORF 5 Continued - HAS ØTHE IMPACT OF POLITICS Ø 1858: Post the Mutiny government assumed control of the three Presidency Banks – Bengal (est. 1806); Bombay (est. 1840 and Calcutta (est. 1843). ØAmalgamation proposals proliferated for making a national bank. ØBusinessmen like Purshottam Lal Tandon wanted zero government control over the Board. John Maynard Keynes 2013 report favoured full control of the government. Presidency Banks resisted amalgamation. Ø 1919: End of WW 1 – Fearing that a State Bank may be imposed above them, Presidency banks, themselves proposed amalgamation. Ø 1921: Amalgamation happened via the Imperial Bank of India Bill – ØOwnership : public plus private from existing Imperial bank ØFunctions: Commercial banking; governments bank; public debt management; limited refinancing of banks BUT note issue and management of For Ex reserves with government.
01 -11 -2020 Sanjeev S Ahluwalia ORF 6 HAS continued Ø 1920 – International Financial Conference – Brussels call for all nations to create a “Central Bank”. Ø South Africa (1921); Columbia (1923); Hungary and Poland (1924) created central banks. Ø 1921 – Overvalued managed £ - make Indian exports cheap - criticized by Indians – demand for hands off currency management. Ø 1921 -1933: debate in India on Ø (a) Ownership – British members wanted a privately owned Bank like Bank of Netherlands. Indian politicians wanted government to fund and control the Bank. Others Indian nationals Ø (b) Management: Politicians -Lala Lajpat Rai, Madan Mohan Malaviya wanted wide representation including of legislatures. Indian business – PD Tandon, R. K. Shanmmukham Chetty- opposed government control. British government – strongly opposed to representation of legislatures on the board. Ø 1930 Creation of a central bank became part of the political dialogue on devolution of government functions to Indian entities. Ø 1934: The Reserve Bank Act came into force – a privately funded bank. Ø 1949: RBI nationalized by statute. BOE nationalized in 1946
01 -11 -2020 Sanjeev S Ahluwalia ORF 7 RBI the limits of autonomy & levers for government control ØSelection committee for Governor & Directors of bureaucrats and experts. ØGovernor and Directors of the Board appointed by the government. ØAppointment can be ended by the government. ØBank Board: Only 5 Directors from RBI, the rest 15 government nominees. ØSection 7(1) Directions can be given by government to the Bank board in public interest. ØSection 7(3) No court or tribunal can interfere with such directions under any other existing law in force. ØSection 30: The entire board can be superseded in public interest. ØSection 45 Y: Mandate overlap disputes to be decided by committee – Chair FM, Gov RBI, Secy DEA, Secy FS, Chair SEBI, Chair IRDA & Chair PFRDA – advantage government.
01 -11 -2020 Sanjeev S Ahluwalia ORF 8 RBI – Autonomy features ØSection 45 ZA : Within governments year 5 monetary policy framework target (4% inflation- range 6 to 2 %) MPC - Governor has a casting vote - decides repo (6. 5%); reverse-repo (6. 25%); marginal standing facility rate (6. 75%); bank rate (6. 75%). ØGovernor RBI has full operational autonomy. ØDecides Statutory Liquidity ration (19. 5%); Cash Reserve Ratio (4%) ØSole banker for central and state governments. ØSole issuer of notes - Maintain adequate availability of currency. ØPayments and settlements regulator. ØForeign Exchange reserve management: Buy sell gold, foreign exchange and foreign securities. ØLiquidity management -Buy sell promissory notes and discount bills with adequate security (Financial Management Committee of Dy. Governors reviews liquidity using call money rates as a metric. ØFrame operational prudential regulations for banks, NBFCs - must be approved by government and placed in Parliament. ØPower to inspect, seek information and direct banks and non banking financial companies.
01 -11 -2020 Sanjeev S Ahluwalia ORF 9 The more things change, the more they remain the same. 1866 to 2018 – even without internet, crooks collaborated across continents Ø 1866: BOE becomes insolvent; 1866 -68: Bank of Bengal also insolvent Ø 1869: Charles Jackson Commission Report list reasons for failure. 1. Removal of many of the earlier restrictions on the bank’s activities ; 2. ‘Abuse of powers’ by weak and unprincipled Secretaries; 3. Young and inexperienced commercial Directors; 4. Neglect of their duty by Government Directors; and 5. ‘the very exceptional nature of the times’. - These reasons resonate even today –Bank NPAs, ILFS
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