NEW DELHI,NOV 09:
Amid a face-off with the RBI, the government Friday said it is discussing an “appropriate” size of capital reserves that the central bank must maintain but denied seeking a massive capital transfer from the Reserve Bank.The Reserve Bank of India (RBI) has a massive Rs 9.59 lakh crore reserves and the government, if reports are to be believed, wants the central bank to part with a third of that fund — an issue which along with easing of norms for weak banks and raising liquidity has brought the two at loggerheads in recent weeks.
Economic Affairs Secretary Subhash Chandra Garg took to the twitter to clarify that the government wasn’t in any dire needs of funds and that there was no proposal to ask the RBI to transfer Rs 3.6 lakh crore. The government, he said, is on track to meet the fiscal deficit target of 3.1 per cent for the financial year 2018-19.
“There is no proposal to ask RBI to transfer (Rs) 3.6 or (Rs) 1 lakh crore, as speculated,” he tweeted.”Government’s FD (fiscal deficit) in FY 2013-14 was 5.1 per cent. From 2014-15 onwards, Government has succeeded in bringing it down substantially. We will end the FY 2018-19 with FD of 3.3 per cent.Government has actually foregone (Rs) 70,000 crore of budgeted market borrowing this year.” Garg said the only proposal “under discussion is to fix appropriate economic capital framework of RBI”.
Economic capital framework refers to the risk capital required by the central bank while taking into account different risks.Former Chief Economic Adviser Arvind Subramanian had in Economic Survey 2016-17 said the RBI was already exceptionally highly capitalised and nearly Rs 4 lakh crore of its capital transfer to the government can be used for recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency. However, this proposal never saw the light of the day.On Thursday, former finance minister P Chidambaram had alleged that the Narendra Modi government was trying to capture the RBI to tide over its fiscal crisis.”The government stares at a fiscal deficit crisis. The government wants to step up the expenditure in an election year. Finding all avenues closed, in desperation, the government has demanded Rs 1 lakh crore from the reserves of RBI,” he had stated.
If RBI Governor Urjit Patel stands his ground, the Centre is planning to issue a direction under Section 7 of the RBI Act, 1934, directing the apex bank to transfer Rs 1 lakh crore to the government’s account, he had claimed. Section 7 of the RBI Act gives special powers to the government to issue directions to the RBI governor on issues of public interest.The government is seeking a transparent formula for arriving at a minimum threshold capital reserve needed to be maintained in line with globally acceptable practice, an official claimed.”Currently, the RBI’s capital needs put its provisioning at 27 per cent, while most central banks have theirs at 14 per cent. Our calculations state that if RBI provisions at 14 per cent.
