Former Reserve Bank of India (RBI) governor Raghuram Rajan has warned that transfer of excess reserve of the central bank to the government may bring down its rating, which in turn would make borrowing costlier for the RBI. This would then lead to implications for the entire economy.
The former RBI governor response to the question about downgrading of RBI’s rating due to excess reserve transfer by the RBI to the Centre was, “It could… it depends on how much. It may not be an issue…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 that require really high credit rating. For example, the swap we did in 2013. So, for that we needed an umimpeachable balance sheet. Why don’t we keep the RBI as in unimpeachable balance shet with AAA credit rating that requires certain amount of equity,” he added.
Rajan also said that the RBI usually pays the entire profit and only keeps a portion of it with itself for contingency reserves. The word in itself suggest that it is kept by the central bank for tackling any unforeseen situation.
“The RBI can pay profit and not whatever it holds for contingency reserves for movement up and down. For example, the rupee that depreciated could also strengthen…so we should accommodate for that,” he said.
In an exclusive interview to NDTV on Sunday, Rajan said that central bank always have this pressure to pay the government more.
“When I was governor, we paid the highest dividend to the government. But that isn’t the issue any more. The government’s doesn’t just want the profit, it wants the excess,” he said.
He also said that demonetisation was a bad idea.
“I was asked about demonetisation, I said it was a bad idea. (GST) is a good idea in the longer term but it had a short term teething effect… India suffered because of GST and demonetisation. Just as the world economy was growing, the Indian economy growth slowed because of the implementation of both GST and demonetisation,” Rajan said.