The Reserve Bank of India board meeting on Monday decided to set up an expert committee to examine the central bank’s Economic Capital Framework (ECF), a key demand of the government. The membership and terms of reference of the committee will be “jointly determined” by the government and the RBI.
The government was seeking to transfer a surplus of Rs 3.6 lakh crore, more than a third of the total Rs 9.6 lakh crore reserves of the central bank to the government. The ministry had suggested that this surplus can be managed jointly by the RBI and the government. The Finance Ministry had felt 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.
The RBI has contended that this attempt by the government to dip into its reserves can adversely impact macro-economic stability. The Finance Ministry had argued 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. The government is of the view that RBI has over-estimated its capital reserves requirements resulting in excess capital of Rs 3.6 lakh crore.
The government has proposed that the use of these funds should be decided in consultation with the RBI. 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.
In 2017-18, the RBI transferred a surplus of Rs 50,000 crore to the government (comprising an interim transfer of Rs 10,000 crore), up from Rs 30,659 crore in 2016-17, but lower than in the previous three years. For the year ended June 2018, the RBI had total reserves of Rs 9.6 lakh crore, comprising mainly currency and gold revaluation account (Rs 6.91 lakh crore) and contingency fund (Rs 2.32 lakh crore). In his speech on October 26, which brought into open the tussle between the finance ministry and the central bank, RBI Deputy Governor Viral Acharya said how a transfer of excess reserves from a central bank to government can be “catastrophic,” as had been proven in the case of Argentina.