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In talks with RBI to fix economic capital framework: Government

The Finance Ministry has so far maintained silence on the issue, but Garg’s tweet Friday suggests that the government is looking to build bridges in its relations with the RBI.

By: ENS Economic Bureau | New Delhi | Updated: November 10, 2018 6:53:02 am
In talks with RBI to fix economic capital framework: Government Union Finance Minister Arun Jaitley and Economic Affairs Secretary Subhash Chandra Garg (Express Photo/File)

The government is in discussion with the Reserve Bank of India (RBI) to “fix appropriate economic capital framework” for the central bank, Department of Economic Affairs Secretary Subhash Chandra Garg said Friday.

The Finance Ministry, officials said, is of the view that the existing economic capital framework — which governs the RBI’s capital requirements and terms for the transfer of its surplus to the government — is based on a conservative assessment of risk by the central bank and that a review of the framework would result in “excess capital” being freed, which the RBI can then share with the government.

“Lot of misinformed speculation is going around in media. Government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer (Rs) 3.6 or (Rs) 1 lakh crore, as speculated,” Garg said in a tweet. “Only proposal under discussion is to fix appropriate economic capital framework of RBI,” he said. The government and the RBI have been unable to come to common ground on what the “appropriate” economic capital framework is.

Express Explained | How RBI surplus transfers work

The Finance Ministry has so far maintained silence on the issue, but Garg’s tweet Friday suggests that the government is looking to build bridges in its relations with the RBI which have soured over the past couple of months over differences on a range of issues, including the appropriate level of equity capital for the central bank.

Garg’s tweet comes ahead of the RBI central board meeting on November 19 where government nominee directors are expected to push for various relaxations in rules.

The Indian Express had reported Tuesday that the Finance Ministry has pegged the RBI’s excess capital at Rs 3.6 lakh crore, which it is seeking as surplus in its discussions — a proposal opposed by the central bank.

The estimates of excess capital were arrived at after a new formula was proposed by the Finance Ministry in discussions with the RBI for fixing the appropriate economic capital framework. The Finance Ministry’s view is that the current framework was “unilaterally” adopted by the RBI in last year because both the government nominees on the Board were not present during the meeting. The government, sources said, did not accede to this framework and has since been constantly seeking discussions with the RBI.

“What is this jargon put out by the government about ‘fix the economic capital framework of the RBI’?… You fix what is broke. Which part of RBI is broken that the government is anxious to fix?,” former Finance Minister P Chidambaram said on Twitter Friday.

“If the (RBI) Governor stands his ground, the government is planning to issue a Direction to the RBI under Section 7 directing the RBI to transfer Rs 1 lakh crore to the government’s account. In that event, the Governor has only two options: (1) to transfer the money or (2) to resign,” Chidambaram had said in his tweet Thursday.

The government believes that, when compared with global central banks, the RBI holds much higher total capital as a percentage of its total assets (at about 28 per cent). Countries including the US, the UK, Argentina, France, Singapore maintain much lower capital as a percentage of total assets, while the same for countries including Malaysia, Norway and Russia are much higher than India. A top Finance Ministry official had said that the RBI’s total capital as a percentage of its total assets, which, when aligned to the global norm of 14 per cent adopted by most central banks, will free up “significant capital”.

As on June 30, 2018, the RBI had total assets of Rs Rs 36.17 lakh crore on its balance sheet. A ten percentage point reduction in the norm of maintaining total capital as a percentage of the assets could result in excess capital of Rs 3.6 lakh crore. The exact amount of surplus transfer from the RBI to the government will only be known after the RBI and government come to common ground on a mutually agreed framework. The government and the RBI continue to have major differences on how to arrive at “appropriate” level of economic capital of the central bank.

Garg said the government’s fiscal situation is under control and it is confident of maintaining the fiscal deficit target at 3.3 per cent of Gross Domestic Product. “Government’s FD (fiscal deficit) 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) 70,000 crore of budgeted market borrowing this year,” he said.

While the Secretary claimed that fiscal deficit has been brought down from 5.1 per cent in 2013-14, it was actually at 4.4 per cent that year, as per budget documents.

Many economists and expert committees have in the past argued that the RBI is holding much higher capital that required to cover all its risks and contingencies. Former Chief Economic Adviser Arvind Subramanian, in the Economic Survey 2016-17, said that the RBI is “is already exceptionally highly capitalized” and nearly Rs 4 lakh crore of its capital transfer to the government can be used for recapitalizing the banks and/or recapitalizing a Public Sector Asset Rehabilitation Agency. This proposal was opposed by the then RBI Governor, Raghuram Rajan. The Malegam Committee in 2013 estimated that the RBI was holding Rs 1.49 lakh crore of reserves and buffers in excess of its requirements.

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