INSUBCONTINENT EXCLUSIVE:
By Andy MukherjeeAn institution with money-printing powers should have no difficulty keeping the lights on
But could it continue to act effectively after depleting its net worth
Former Bank of England policymaker Willem Buiter posed that question
ignoring the risk of ramming into a submerged iceberg.
First, consider the counterargument
Chile, Mexico and Israel are examples of central banks that have discharged their mandates successfully despite weak capital positions
or the Bank of Japan with anything resembling the trepidation it saves for overextended commercial banks or hedge funds.
The reason for that
borrowing cost of 6.9 percent
Add up the present value of all future profits from not having to pay interest on a $363 billion pile growing in line with the economy, and
throw in the $25 billion saved this year
power of cheap money-printing to earn profits and repair its balance sheet, and lost control of inflation
Concentrating solely on the $498 billion of documented assets and liabilities, it might ask why Patel needs $95 billion in revaluation
reserves and another $32 billion in contingency funds
the balance sheet without a concomitant decrease in the other
Raiding a little more than half of the $95 billion foreign-currency and gold revaluation account would, from a risk-management view, force
the RBI to sell an identical proportion of the related assets, or $190 billion
Sharma, a former central bank executive director, noted in the TheIndianSubcontinent recently
experiment: the ban in November 2016 on 86 percent of currency in circulation
That, too, squeezed the monetary base by 34 percent in just one quarter, causing the economy to keel over
Patel was barely two months into his job when he was pushed to execute the note ban
But now he should, with all the arguments at his disposal, including those of Buiter.
(This column does not necessarily reflect the opinion
of economictimes.com, Bloomberg LP and its owners)
