New Delhi: The stage is set for another showdown between the Reserve Bank of India (RBI) and the Union government with the Centre sticking to its ground on Friday.
Stage set for another RBI-govt showdown
Discussions are underway with the RBI to decide the appropriate economic capital framework of the central bank, Subhash Chandra Garg, secretary of the department of economic affairs, said on Twitter.
The statement comes at a time when the government and RBI are at loggerheads over a range of issues, including norms regarding weak banks, the liquidity problem faced by non-banking finance companies, as well as pressures on the central bank to transfer more of its surplus to the government.
The meeting of the central board of the RBI on 19 November is likely to be stormy with the government determined to take up these issues and press for a decisive outcome.
“The government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer ₹3.6 (lakh crore) or ₹1 lakh crore, as speculated…. Only proposal under discussion is to fix appropriate economic capital framework of RBI,” Garg tweeted.
Economic capital framework refers to the capital required by the central bank while taking into account different risks. Once this is finalized, excess reserves could be transferred to the government, providing the latter with a fiscal cushion.
In a speech last month, RBI deputy governor Viral Acharya listed challenges to the independence of the RBI and said: “Having adequate reserves to bear any losses that arise from central bank operations and having appropriate rules to allocate profits (including rules that govern the accumulation of capital and reserves) is considered an important part of central bank’s independence from the government. A thorny ongoing issue on this front has been that of the rules for surplus transfer from the RBI to the government..”
Friday’s statement, said economist and Mint columnist Indira Rajaraman, “seems to indicate that the government is looking to allay market fears. It seems the government wants to convey that it does not plan to wipe out RBI’s capital but is only looking for a reasonable share—any excess surplus that can be transferred.”
“In principle, the RBI should have on hand some internally worked out calculations of the optimal level of the three kinds of reserves in the RBI balance sheet,” she said.
These are valuation reserves for dealing with volatility in foreign exchange holdings and government securities, asset development reserves for taking care of depreciation and other asset-related costs, and a contingency reserve to take care of any unforeseen emergencies. As of June 2018, the total amount in these three types of reserves exceeded ₹9 trillion with more than ₹6.9 trillion in valuation reserves, RBI’s annual accounts show.