Unromantic Love between Central Banks & Governments

1. Unromantic Love between Central Banks & Governments

2. WHAT IS CENTRAL BANK? • The independent national institution responsible for printing and distribution of money and credit. • It controls the commercial banking operations of any economy • Provides Banking and Financial Services to the government • It is responsible for the monetary policy formulation and implementation GOALS • Control Inflation • Keep Unemployment rate low • Stabilise the nation’s currency

3. HISTORY OF CENTRAL BANKS • Sveriges Riksbank, the first central bank was established in 1668. • Few decades later, in 1694, the most popular central bank came into existence, Bank of England. • Central Banks were lenders to the government who funded the government objectives. • Default of monarchs or government led to falling credibility of authorities and failure of financial systems. • This system allowed to stabilise currency, borrow at lower rates to flourish the economy. • In 19th century, capitalism plagued with financial panics reducing creditworthiness of private banks. • This system was being accepted widely by different countries by pegging currency and gold • In 1907, USA again hit with another crisis known as KnickerBocker Crisis resolving it led to creation of US Fed in 1913.

4. MAJOR CENTRAL BANKS ACROSS WORLD • Federal Reserve System • European Central Bank • People’s Bank of China • Bank of Japan • Bank of England • Reserve Bank of India • Banco Central do Brasil • Bank of Canada • Central Bank of Russia • Reserve Bank of Australia

5. RELATIONSHIP BETWEEN CENTRAL BANKS AND GOVERNMENT • One common objective for both of them is economic development and well-being of the nation. • Government plays a key role in facilitating the development prospects by building required infrastructure and supporting through various aids. • The central bank acts as the lender of last resort for funds, especially for developing nations which have lingering deficits. • Central Bank, though independent and legal monopoly, is under the purview of government in one or other form. • They mutually respect their domains and try to sustain the growth of economy.

6. THE UNROMANTIC LOVE! Democratic setup & Political Reasons Most of the leading nations elect their governments democratically. So, ruling authorities have to prove themselves being a better option. Central bank’s mandate is to curb inflation rates and keep economy under control.

7. INDIAN CENTRAL BANK - RBI • Founded on April 1st under RBI Act, 1934. • Nationalised in 1949, since then completely owned by Government of India. • Preamble of RBI states its basic functions. 1. Monetary Supply 2. Keep reserves for monetary stability 3. Operate the currency and credit system • During 1960-70, banks crashed which led to nationalising of many banks. RBI played a key role in controlling and supporting these banks. • Further nationalisation of banks increased the regulation power of RBI over banks and became a bigger player in the economic development of India • Post LPG, need for private banking sector emerged leading to setup in 1993.

8. AUTONOMY OF RBI It can be looked into as 4 phases • Pre Independence (1935-1948) • Post Independence ( 1948 - 1969) • Nationalisation ( 1969-1991) • Economic Liberalisation ( 1991 -2010)

9. IN THE LAST DECADE.. 2010 - Setting up of Financial Stability and Development Council 2012 - RBI Governor Subbarao & Fin Min Chidambaram. Push to reduce repo rates 2013 - Recommendations by Financial Services Legislative Reforms Commission 2016 - • Technical Advisory Committee replaced by Monetary Policy Committee, RBI Guv doesnt have veto power. • Financial Sector Search and Recruitment Committee, headed by Cabinet Secretary • Tried to separate debt management function from RBI, though not implemented 2017 - Proposal for FRDI bill 2018 - Expansion of FSDC members to 8 out of 12 Separation of Payment Regulatory Authority headed by bureaucratic chairmanship

10. RECENT TUSSLE RBI Governor Urjit Patel resigns. Why? Government and RBI were in a great battle. The government was fierceful in pushing its recommendations. • Easing norms of PCA to increase the credit lending capacity of 11 PSBs which are under PCA • Threat to invoke section - 7 of the RBI Act • Transfer of excess capital reserves with RBI to Government • 9.59 lakh crores, which is 28% of its total assets in contrast to the global average of 16%. The negotiations ended up in a temporary respite and with some wounds for RBI

11. Thankyou - K A Bharadwaj