Stage set for another RBI-govt showdown

P Chidambaram

"It has to be, however, less conservative in its assessment", a senior official said, adding that whatever amount is decided upon, the RBI does not have to pay at once, but can spread it out over some years.

This proposal led to a speculation that the government wants to lay hands on a part of the RBI's massive Rs 9.59 lakh crore reserves.

The government's demand is expected to further fuel tensions with the RBI, which has been pushing back any moves that curtail the central bank's independence.

In what seemed to be a softening of its stance by the government in its tussle with the Reserve Bank of India (RBI), Economic Affairs Secretary Subhash Garg on Friday said there was no proposal by the Centre to ask the central bank to transfer any specific amount. "A thorny ongoing issue on this front has been that of the rules for surplus transfer from the Reserve Bank to the government..."

RBI sources confirmed that the issue of fixing the norm on surplus reserve did figure in the recent communication between the government and the RBI.

According to another official, the government wants the RBI to have a new policy in place for dividends and capital reserves.

The economic affairs secretary was confident about the government's ability to meet the fiscal deficit target for the current fiscal year and reiterated the government stand that it will adhere to fiscal prudence. The government and the RBI have been unable to come to common ground on what the "appropriate" economic capital framework is.

Without acknowledging that the notices have been sent to the RBI, the Union finance ministry had said the "autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement". Government's FD in FY 2013-14 was 5.1%.

As on June 30, 2018, the RBI had total assets of Rs Rs 36.17 lakh crore on its balance sheet. From 2014-15 onwards, Government has succeeded in bringing it down substantially. "We will end the FY 2018-'19 with FD of 3.3%. Government has actually foregone Rs 70,000 crore of budgeted market borrowing this year", Garg 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.

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 (NBFCs), as well as pressures on the central bank to transfer more of its surplus to the government.

"What is this jargon put out by the government about "fix the economic capital framework of the RBI"?..."

Sources say that transfer of surplus reserves also figured in the Economic Survey crafted by former Chief Economic Adviser Arvind Subramanian, who batted for RBI transferring over Rs 4 lakh crore to the government.