Can the Reserve Bank go broke. Yes it can.

In view of the recent tension between the government and the Reserve Bank of India (RBI), A Mukherjee asked a very pertinent question, "Can a central bank really go broke?" For those of us who are not economists the answer is an unqualified yes. Eight countries have defaulted on their debt since 2001 which means that they were bankrupt, just as Sears Holdings Corp declared bankruptcy for not being able to service its debts. The RBI is holding nearly Rs 10 trillion in reserves, of which Rs 2.3 trillion is its contingency fund and Rs 7 trillion is revaluation of gold and foreign currencies. In the government's view that is excessive and it wants the RBi to transfer Rs 3.6 trillion, with the general elections in May 2019. If the RBI resorts to printing money to meet its liabilities it could result in hyperinflation, as Venezuela is experiencing. The RBI cannot reduce its assets without reducing its liabilities which would severely reduce liquidity in the economy. "The trouble is that the central bank can't reduce one side of 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 portion of the related assets, or $190 billion. That would trigger a 'cataclysmic deflationary shock' for the economy, as VK Sharma, a former central bank executive director, noted in the Business Standard recently," explained Mukherjee. The previous Governor of the RBI Raghuram Rajan explained how the RBI earned its profits because it pays no interests on its liabilities. It transfers those profits to the government. "So we earn a large surplus profit, more than all the public sector put together, because of the RBI's role as the manager of the country's currency. This belongs entirely to the country's citizens..." Therein lies the problem because politicians in India believe that taxpayer money belongs to them. In a shameless election gimmick the Chief Minister of Chhattisgarh is to distribute 5.5 million smartphones for free. Which means free access to pornography and a possible increase in rapes. There were rumors that the Governor of the RBI Urjit Patel may resign which would have set financial markets on fire. The RBI has built its reserves over decades and there is no reason why this government should take it by force to win an election, wrote L Venkatesh. Why is the government so desperate? Because revenue from the Goods and Services Tax is short by Rs 1 trillion and 38.6% of direct taxes have been raised in the 6 months to 30 September. A compromise was worked at the RBI board meeting on 19 November but it may not hold. If oil prices start rising again, putting pressure on the current account deficit, politicians and civil servants will be out to suck blood. To hell with the economy.