Financial Markets and the Economy - Intersections

(The following article appeared in Bloomberg Quint on May 31, 2021 per link below: https://www.bloombergquint.com/opinion/funding-indias-economic-recovery-the-prudent-way ) Funding India’s Economic Recovery the Prudent Way   Last week, the Reserve Bank of India (RBI) declared that it would transfer a surplus of INR 99,122 crores to the Government of India (GOI), around twice the amount budgeted.    As we battle the pandemic, this feels like welcome news. Is there more where this money came from?    Committees have agonized over how much surplus the RBI should transfer to the GOI. Let’s avoid that end of the debate. Instead, let’s evaluate the outcomes of such transfers on the economy.    We argue that RBI surpluses spent by GOI amount to money creation, funded by forced, cheap, short-term banking loans to the sovereign. These reduce real interest rates and penalize savers. In the current context, this entails risk of asset price and general inflation, widening inequities, and external

 (A version of this note appeared in Mint per the link below: ) https://www.livemint.com/industry/banking/why-rbi-urgently-needs-a-forex-policy-11620227308648.html   India’s Exchange Policy Framework Unlike monetary policy, which is conducted under the explicit mandate of inflation targeting, foreign exchange management is left to the discretion of the Reserve Bank of India (RBI). For many years now, RBI has maintained that it does not target any value of the Rupee and only steps in to control some unstated measure of currency volatility. However, the sheer magnitude and nature of RBI intervention leaves it as a substantial determinant of currency rates, irrespective of its stated policy or intent.    The core of RBI’s intervention policy through fiscal year 2020-21 (FY21) was excellent. It acted as a volatility heat sink amidst massive foreign exchange inflows. It prevented excessive INR overvaluation that could have impeded India’s domestic output, employment, and prospects for Atman