Opinion | An easy surrender of the country’s economic defences

The global economy is admittedly in a strange place and even the usually reliable experts are struggling to decode an evolving economy and the central bank’s place in it. To address this new normal, we are conducting a public review of our monetary policy strategy, tools, and communications.” Coincidentally, the same day Lawrence Summers and Anna Stansbury published a Project Syndicate article: “Tweaking inflation targets, communications strategies, or even balance sheets is not an adequate response to the challenges now confronting the major economies.” Into this world of known-unknowns, made even more dangerous by lurking unknown-unknowns, the board of RBI has decided to hand over part of its reserves—husbanded scrupulously from normal central banking operations as buffers against future volatility and myriad risks—to the government. Things reached a flashpoint with the government threatening to invoke a rarely used provision in the RBI Act, and thereafter appointing an ideologue to the central bank’s board in a show of primacy. The committee has suggested that RBI’s “available realised equity”—or its economic capital, comprising capital, reserve fund and risk provisions —should range within 6.5% and 5.5% of the balance-sheet size. The reality is that the roots of RBI’s surplus during 2018-19 lie in the government’s policy missteps—primarily demonetization and a flawed goods and services tax structure—and thereafter the central bank’s attempts to apply band-aids and patches through an expansionary monetary policy.