Central Banks Are Expected to Save the World

India's record dividend was great timing for Prime Minister Narendra Modi as he raises public servants' wages.

Bank Of India Governor Raghuram Rajan

Outgoing Central Bank Governor Raghuram Rajan.

Photographer: Dhiraj Singh/Bloomberg

Central banks are expected to save the world. And if they can make some money along the way for cash-strapped governments, all the better.

Take India, where outgoing Governor Raghuram Rajan has been beefing up the country's foreign exchange reserves as a safety net against capital outflows. Income from foreign sources rose 11.5 percent last fiscal year, enabling the Reserve Bank to pay the finance ministry a dividend of about $10 billion, matching the previous year's record. That's great timing for the government of Prime Minister Narendra Modi, which just started doling out pay raises to public servants.

Yet it's a fraction of the U.S. dividend. The Federal Reserve's $4.5 trillion balance sheet helped generate enough profit to pay a record $117 billion remittance to the U.S. Treasury—including $19.3 billion that Congress wrung out for highways. Other countries enjoy additional sources of income: Central banks in South Korea and France pay corporate taxes in addition to dividends. 

Of course, the extra cash is never guaranteed. It's gotten complicated in Japan, for example, where the central bank's massive stimulus hit the dividend. The Bank of Japan last year reduced its payment to the government to build up a buffer against potential losses on the bonds it's been buying. South Africa's central bank, too, opted to use a surplus to replenish its contingency reserves. Its Brazilian counterpart just reported an operational loss of $5.3 billion, which the treasury will probably have to cover with a bonds allocation.  

In India, the proportion of the central bank’s net income paid as dividends increased under Rajan, following the recommendations of a Reserve Bank-appointed committee.  Yet  as the government looks for cash to recapitalize public-sector banks saddled with bad loans, it has floated the idea of tapping the central bank's emergency funds. 


Rajan, who returns to academia this month, has made it clear he doesn't like that idea. Asking the central bank to pay more than it earned is akin to infusing permanent liquidity that will have to be taken back through other channels, he said.

"It's not easy, free money lying out there,'' he told reporters last month. "The best way is to let the RBI pay out whatever dividends it can and use those dividends, if you want, for all the good things that the government needs to do.''

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