With the Reserve Bank of India’s (RBI) surplus reserve running up to Rs 9.63 lakh crore, the government is now planning to ask the central bank to fix the norm on surplus reserve. Sources say this could lead to the government then asking for a transfer of the remaining amount after the threshold is set.
In simpler terms, the government wants the RBI to set the rules for surplus reserve, including “the adequate safe level”.
Top sources have confirmed to India Today that the government – through it’s representatives on the RBI board which has Governor Urijit Patel and four deputy governors as full time directors – will press for “fixing the norms for surplus reserve” maintained by the RBI.
There have been reports that the Centre has already thrice asked the RBI to transfer Rs 3.6 lakh crore from its reserves.
The tug of war between the Centre and the RBI is expected to be one of the key points of discussion at the RBI board meet on November 19.
Recently, the government moved to “invoke Section 7” of the RBI Act – a never exercised power – to deal with the central bank crisis.
On the cash surplus issue, a senior government official said, “The surplus that the RBI is controlling is way beyond government norms. The global norm sets 14% of the GDP to be kept in reserve by the central bank. The RBI instead has 27%. And this is not driven by any decision or order. It’s purely arbitrary. There has to be some norms on how much the RBI can keep.”
I fear the worst at the next meeting of the Board on November 19, 2018, and I consider it my duty to warn the people of the country of the catastrophic consequences of the BJP government’s ill-conceived actions.
P. Chidambaram (@PChidambaram_IN) November 9, 2018
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. However, the government completely rejected the report that it had “asked for transferring of the surplus” or fixed Rs 3.6 lakh crore target for the RBI to transfer.
But RBI and banking experts have said that the government’s push for the fixing of norms is a clever move to create the grounds for a future demand for transfer.
However, another source in the government said, “Asking RBI to transfer a specific amount didn’t figure in the government’s letter to the RBI but in some internal discussions, a ballpark figure beyond the global norm did come up”.
Meanwhile, the Centre seems to be busy setting the tone for the RBI board meeting. On Friday, Economic Affairs Secretary Subhash Chandra Garg said in a tweet, ” proposal under discussion is to fix appropriate economic capital framework of RBI.”
This comes as yet another giveaway as the elementary interpretation of ‘appropriate economic capital framework’ is fixing a suitable norm for surplus reserve.
The ongoing tussle between the Centre and RBI has handed ammunition to the Opposition. Former Finance Minister P Chidambaram tweeted, “I fear the worst at the next meeting of the Board on November 19, 2018, and I consider it my duty to warn the people of the country of the catastrophic consequences of the BJP government’s ill-conceived actions.”
The immediate goal of the government is to lay its hands on the reserves of the RBI and appropriate a sum of at least Rs 1 lakh crore to meet its fiscal deficit target and to increase spending in an election year.
P. Chidambaram (@PChidambaram_IN) November 9, 2018
To neutralise the mounting apprehension, Garg through his tweets stepped in to quash various news reports claiming that the government is pushing RBI to transfer its surplus reserve and that the RBI is reluctant to part with it to maintain its fiscal deficit, which due to several reasons is likely to breach the target.
Through a series of posts, Garg said, “A lot of misinformed speculation is going around in the media. Government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer Rs 3.6 or 1 lakh crore, as speculated. Government’s FD in FY 2013-14 was 5.1%. 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 70000 crore of budgeted market borrowing this year.”
On June 30, RBI’s surplus reserve stood at Rs 9.63 lakh crore (approx). This includes balances in Contingency Fund, Asset Development Fund (ADF), Currency and Gold Revaluation Account (CGRA), Foreign Exchange Forward Contracts Valuation Account (FCVA) and Investment Revaluation Account Rupee Securities (IRA-RS), besides some minor accounts head.
CENTRE VS RBI
The Centre vs RBI controversy on transfer of surplus reserves became public on October 26, when RBI Deputy Governor Viral Acharya, in a speech, quoted Alberto Ramos, the Argentinian analyst at Goldman Sachs to say – “Using central bank reserves to pay government obligations is not a positive development and the concept of excess reserves is certainly open to debate. It weakens the balance sheet of the central bank and provides a wrong incentive to the government, as it weakens the incentive to control the rapid expansion of spending and to promote some consolidation of fiscal accounts in 2010.”
The government is now intent upon getting a fix on how much reserve the RBI can maintain. The idea is to have a “safe level” and replace the current system where the RBI is the sole arbiter on what is “adequate”.
The Centre is gearing up to contest the RBI’s reluctance and the Opposition’s tirade by claiming that the “idea of fixing a norm or transferring surplus reserve” is not new.
For fiscal 2017-18, the RBI transferred surplus Rs 50,000 crore to the government.
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.
A senior finance ministry official confirmed that the idea originated during the UPA tenure and also the need to fix how much surplus reserve RBI should keep and how much it should transfer to the government.