Section 10(5) of the BoM Act provides for Govt action “for the purpose of preserving the amount paid as capital of the Bank from any impairment.” Govt should act urgently to recapitalize the BoM in order to support its financial credibility and reputation.
The recent IMF staff report 2022 already made the policy recommendation that Govt should recapitalize the BoM to finance monetary policy costs, namely, the costs of issuing debt securities to mop up excess liquidity and control inflation, estimated at about Rs2.5 bn. According to the IMF, a timely recapitalization of the BoM would support its independence and policy credibility, since “BOM capital is relatively low at Rs10 billion, which limits resources to sustain policy costs at higher interest rates and increased sterilization amounts”. IMF already considered the BoM as having negative net worth.
Govt has however held the view that the current level of BoM capital would suffice to cover monetary policy costs. The losses incurred in April and May 22 by the BoM were significantly offset only by transferring back in June 22 an amount of Rs5 bn to capital reserves, which has hereto been held with the BoM pending transfer to Govt. The April 22 monthly financial statement of the Bank is still unpublished. Continuing BoM losses in Aug 22 imperatively call for BoM recapitalization.
Lack of confidence in the financial strength of the BoM to conduct anti inflationary policies can only lead to further weakness in the rupee, and still higher inflation. Our high rate of inflation in not just a result of the increase around the world, with food and energy prices hitting record highs-it’s also because of their incompetency/irresponsibility that has crippled the CB's monetary policy effectiveness in tackling inflation.
An early and effective BoM recapitalization is an urgent and necessary measure to combat inflation.
