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Transfer of excess reserve to govt may pull down credit rating of RBI: Raghuram Rajan
Dec-18-2018

Former RBI Governor Raghuram Rajan has warned that transfer of excess reserve by the Reserve Bnak of India (RBI) to the government may pull down credit rating of the central bank. He also said that rating downgrade of the RBI from ‘AAA’ would make borrowing costlier for the central bank and will have implication for the entire economy. He said “We are ‘Baa’ country. We are barely investment grade. Sometime, we need to undertake international transactions which require really high credit rating.”

Emphasizing that profit of the central bank largely comes due to depreciation of Indian currency, Rajan said keeping a portion for the contingency reserves, RBI usually pays entire profit. He also noted that RBI can pay profit and not whatever it holds for contingency reserves for movement up and down. He also informed that last month, the RBI board decided to set up a high-level committee soon to examine the Economic Capital Framework (ECF) of the central bank, in a move that could prompt a rethink of what constitutes adequate capital reserves for the central bank.

Former RBI Governor further said there is always a pressure on the central bank to pay the government more. He said “the three years that I was Governor, we paid the highest dividend in RBI’s history to the government. The issue at stake is not that anymore. The issue is more than that. It’s not just the profit, they want the excess. And the Malegam Committee had opined that you cannot pay more than the profit.”

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