India’s central bank unveils USD24B windfall for government

NEW DELHI (AFP) – India’s central bank has announced a USD24-billion windfall for the cash-strapped government, giving a much-needed boost to Prime Minister Narendra Modi as he seeks to kickstart growth in Asia’s third-biggest economy.

But the payout will likely stoke fresh concerns about the Reserve Bank of India’s (RBI) independence following a standoff that has seen top officials quit amid accusations of government interference.

Modi has come under increasing pressure to fire up the economy, which has slowed in each of the past three quarters – losing its status as the world’s fastest-growing – with unemployment at its highest since the 1970s.

The auto sector has been particularly badly hit, with car sales plunging in July for the ninth month running, while weak consumer spending and high taxes have hit demand for everything from biscuits to hair oil.

The RBI said it had approved a transfer of INR1.76 trillion (USD24.4 billion) to government coffers, including a dividend of INR1.23 trillion and INR526 billion in excess reserves following the adoption of a new methodology for assessing market risk.

Monday’s announcement came days after Finance Minister Nirmala Sitharaman announced a slew of measures to help the economy, including bringing forward a USD10-billion liquidity lifeline for credit-shy banks and rolling back an extra levy on equity sales that had spooked foreign investors.

Economist at Anand Rathi Securities Sujan Hajra said that the latest announcement is a “positive move” for the economy and for public finances.

“As the RBI said, despite this fund transfer, India will still have one of the best capitalisations of the central banks globally and it does not reflect poorly on either the government or the central bank,” Hajra told AFP.

Independent economist from Mumbai Ashutosh Datar agreed, telling AFP, “The amount looks huge but it is not and there is no raid on RBI reserves.”

However, the bank’s independence has already been called into question after it cut interest rates four times this year to a nine-year low, reportedly under government pressure.

Governor Urjit Patel resigned in December following a public spat with the Modi government – which was re-elected earlier this year – accusing it of trying to undermine it.

He was followed in June by deputy governor Viral Acharaya citing the same reasons, although the bank insisted this was unrelated and he had left for personal reasons.