The sudden resignation of Urjit Patel from the post of the Governor of the Reserve Bank of India (RBI) was surprising and almost a historic act.
There have been a lot of recent controversies regarding the RBI’s independence in relation to the Union Government (UG). A lot of central banks like the Federal Reserve of the US enjoy almost full independence in their functioning. In that respect, the RBI does not have it. In case of the other central banks, the government has no role in the choice of key functionalities. But in case of the RBI, the central government enjoys the power of selecting the RBI governor and also his/her deputies.
A section of observers think that one of the main reasons behind Patel’s resignation was the RBI’s opposition to transfer a considerable portion of its reserve capital to the central government as the finance ministry has been running short of adequate revenue requirements. Bringing 11 PSU banks under PCA norms and the controversy over liquidity management after the IL&FS crisis were also some of other important considerations. It is known that there has been a tug of war between the RBI and the Government of India (GoI) in transferring a portion of excess funds from the RBI to GoI. Now the question is, how far is the transfer justified and how much reserve capital can be transferred without hampering the financial stability of the country if any unforeseen and unfavourable circumstance arises.
The status of capital in the RBI
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