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Reserve Bank of India – Independent falcon OR caged parrot. IITM, New Delhi, Nov 16, 2018 Sanjeev S. Ahluwalia ahluss@gmail.com ; https://ahlu-inidia. Dadabhoi Naroji Alan Greenspan Ashish Nandy Douglass North John Maynard Keynes Daron Acemoglu & James A. Robinson.
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Reserve Bank of India – Independent falcon OR caged parrot IITM, New Delhi, Nov 16, 2018 Sanjeev S. Ahluwalia ahluss@gmail.com; https://ahlu-inidia
Sanjeev S Ahluwalia ORF DadabhoiNaroji Alan Greenspan AshishNandy Douglass North John Maynard KeynesDaronAcemoglu& James A. Robinson
Sanjeev S Ahluwalia ORF History/Sociology/Anthropology (HAS) • Warren Hastings Gov. Gen. voices need for a government bank. • Safety of receipts and ease of payments • Common rates for conversion to MurshidabadSicca • Ensure adequate availability of currency locally (EIC collections<expenses) • Issues: Private or public ownership; management control? • 1806 : Bank of Bengal set up as an EIC owned bank • 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 • SOURCE 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. • 1836: British businessmen propose a “Great Bank for British India” Government funded to use British surpluses productively for business. REJECTED by government .
Sanjeev S Ahluwalia ORF Continued - HAS • THE IMPACT OF POLITICS • 1858: Post the Mutiny government assumed control of the three Presidency Banks – Bengal (est. 1806); Bombay (est. 1840 and Calcutta (est. 1843). • Amalgamation proposals proliferated for making a national bank. • Businessmen like PurshottamLalTandon wanted zero government control over the Board. John Maynard Keynes 2013 report favoured full control of the government. Presidency Banks resisted amalgamation. • 1919: End of WW1 – Fearing that a State Bank may be imposed above them, Presidency banks, themselves proposed amalgamation. • 1921: Amalgamation happened via the Imperial Bank of India Bill – • Ownership : public plus private from existing Imperial bank • Functions: Commercial banking; governments bank; public debt management; limited refinancing of banks BUT note issue and management of For Ex reserves with government.
Sanjeev S Ahluwalia ORF HAScontinued • 1920 – International Financial Conference – Brussels call for all nations to create a “Central Bank”. • South Africa (1921); Columbia (1923); Hungary and Poland (1924) created central banks. • 1921 – Overvalued managed £ - make Indian exports cheap - criticized by Indians – demand for hands off currency management. • 1921-1933: debate in India on • (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 • (b) Management: Politicians -LalaLajpatRai, Madan Mohan Malaviya wanted wide representation including of legislatures. Indian business – PD Tandon, R.K. ShanmmukhamChetty- opposed government control. British government – strongly opposed to representation of legislatures on the board. • 1930 Creation of a central bank became part of the political dialogue on devolution of government functions to Indian entities. • 1934: The Reserve Bank Act came into force – a privately funded bank. • 1949: RBI nationalized by statute. BOE nationalized in 1946
Sanjeev S Ahluwalia ORF RBI the limits of autonomy & levers for government control • Selection committee for Governor & Directors of bureaucrats and experts. • Governor and Directors of the Board appointed by the government. • Appointment can be ended by the government. • Bank Board: Only 5 Directors from RBI, the rest 15 government nominees. • Section 7(1) Directions can be given by government to the Bank board in public interest. • Section 7(3) No court or tribunal can interfere with such directions under any other existing law in force. • Section 30: The entire board can be superseded in public interest. • Section 45Y: Mandate overlap disputes to be decided by committee – Chair FM, Gov RBI, Secy DEA, Secy FS, Chair SEBI, Chair IRDA & Chair PFRDA – advantage government.
Sanjeev S Ahluwalia ORF RBI – Autonomy features • Section 45ZA : 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%). • Governor RBI has full operational autonomy. • Decides Statutory Liquidity ration (19.5%); Cash Reserve Ratio (4%) • Sole banker for central and state governments. • Sole issuer of notes - Maintain adequate availability of currency. • Payments and settlements regulator. • Foreign Exchange reserve management: Buy sell gold, foreign exchange and foreign securities. • Liquidity 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. • Frame operational prudential regulations for banks, NBFCs - must be approved by government and placed in Parliament. • Power to inspect, seek information and direct banks and non banking financial companies.
Sanjeev S Ahluwalia ORF The more things change, the more they remain the same. 1866 to 2018 – evenwithout internet, crooks collaborated across continents • 1866: BOE becomes insolvent; 1866-68: Bank of Bengal also insolvent • 1869: Charles Jackson Commission Report list reasons for failure. • Removal of many of the earlier restrictions on the bank’s activities ; • ‘Abuse of powers’ by weak and unprincipled Secretaries; • Young and inexperienced commercial Directors; • Neglect of their duty by Government Directors; and • ‘the very exceptional nature of the times’. - These reasons resonate even today –BankNPAs, ILFS