Subbarao said he would be “ok” if a sovereign bond issue in foreign currency is done once just to test the waters, but cautioned against using the instrument regularly.
Raiding the reserves of the central bank only illustrates the “desperation” of a government, and we should be very wary and careful while determining the value of the excess reserves, warned former governor D Subbarao on Friday.
The career bureaucrat-turned-central banker said he would be “ok” if a sovereign bond issue in foreign currency is done once just to test the waters, but cautioned against using the instrument regularly.
“A government trying to raid the balance sheet of a central bank anywhere in the world is not a good thing. It shows that the government is desperate,” he said, speaking at a CFA Society India event in Mumbai.
In defence of his opposition to the desperate attempts to carve out the reserves, the former governor, who was at the helm during the 2008 global meltdown, said the risks undertaken by the RBI are different from other central banks and it will not be entirely beneficial to draw from international practices.
The comments from Subbarao come at a time when the Bimal Jalan committee is reported to be in the final stages of finalising its report on identifying the appropriate capital for the RBI and how to transfer the excess to the government.
Acknowledging that transfer of the excess reserves was one of the key causes of tension between the RBI and government in the run up to Governor Urjit Patels resignation, Subbarao seemed to suggest that there is little use of the transfers from a fund inflow perspective.
He said international investors look at balance sheets of both the government and also its central bank, and that the same applies to distress time lending by the IMF as well.
“… I do want to say that we should be very careful, very wary of what decision is ultimately taken on the transfer of the surplus reserves,” he said.
Many analysts have pegged the so called excess reserves at around Rs 9 trillion, or around 27 per cent of its core capital, and say the Jalan panel may suggest a staggered payout in the range of Rs 1.5 trillion to Rs 3 trillion over a period of three years.
He advocated maintaining the autonomy of the RBI as essential because of its horizons extend far beyond the immediate objective of elections which a government can be guided by.
Meanwhile, in a departure from his predecessor Y V Reddy and successor Raghuram Rajan, Subbarao said it will be “ok” for the government to test the waters with an overseas bond issue.
“I would say that as a one-time measure, just to test the waters, it’s ok,” he said.
However, the former governor, who now teaches at a Singaporean university, made his apprehensions on the instrument from a long-term perspective clear.
But the fear and concern that strike me is that this will become a thin end of the wedge and once we see that it has become very successful, we might keep on doing it and get into pressure situations needlessly, he said.
The government can just print its way out of issues on domestic debt, which will not be possible in case of external debt, he warned.
There are significant benefits, there are considerable costs of such a move, Subbarao said.
The benefits include signalling a confidence to the global investors about opening up the economy which is generally perceived to be cautious on opening up, he said.
Concerns on issuing sovereign bonds stem from being made hostage to global rate movements and exposing the systems to volatilities, he said.
On the issue of transmission, where banks are being blamed for taking longer to pass on RBIs rate calls to their borrowers, Subbarao said the central banks worries are coming largely from the need to establish its credibility.
Subbarao said the move to inflation targeting has so far been proved to be good, but added that the system will only be tested in times or pressure like stagflation which he had to face.
Photograph: Danish Siddiqui/Reuters
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