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Govt wants Rs 3.6 lakh crore from RBI, a third of its reserves

Govt wants Rs 3.6 lakh crore from RBI, a third of its reserves
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New Delhi: At the heart of the RBI-government standoff is a proposal by the Finance Ministry seeking to transfer a surplus of Rs 3.6 lakh crore, more than a third of the total Rs 9.59 lakh crore reserves of the central bank, to the government. The ministry has suggested that this surplus can be managed jointly by the RBI and the government, the Indian Express reported.

The Finance Ministry claims that the existing economic capital framework — which governs the RBI’s capital requirements and terms for the transfer of its reserves to the government — is based on a very “conservative” assessment of risk by the central bank.

Sources have confirmed to The Indian Express that the RBI views this attempt by the Government to dip into its reserves can adversely impact macro-economic stability. And so the RBI has not accepted the proposed changes, sources said.

For its part, the Finance Ministry argues that the current framework was “unilaterally” adopted by the RBI in July 2017 because both the government nominees on the Board were not present during the meeting. The government did not accede to this framework and has since then been constantly seeking discussions with the RBI.

Govt wants Rs 3.6 lakh crore from RBI, a third of its reserves, central bank says noThe government is of the view that RBI has over-estimated its capital reserves requirements resulting in excess capital of Rs 3.6 lakh crore.

That’s why, sources said, the government has proposed that the use of these funds be decided in consultation with the RBI. These funds can be used, for example, to recapitalise public sector banks, help them expand their loan book and come out of the Prompt Corrective Action framework.

The RBI, however, feels strongly that using central bank reserves has pitfalls. In its opinion, this does not tantamount to any fresh income, and was essentially in the nature of issuing new securities to fund government expenditure. Not only does it hurt the government’s commitment to fiscal prudence, it also affects the confidence of the financial markets.

 

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