Rahul Gandhi: PM Modi needs ₹36,00,00,00,00,000 from RBI to fix the mess he created

At the centre of the RBI and Central government deadlock is a Finance Ministry proposal seeking to transfer a surplus amount of ₹3.6 lakh crore. The amount will be more than a third of the total ₹9.59 lakh crore reserves of the RBI. The Finance ministry has suggested that this surplus can be jointly managed by the Central Bank and the government.

According to a report in The Indian Express, the Finance Ministry claims that current economic capital framework, which administers the RBI’s capital requirements and terms for the transfer of its reserves to the government, is based on very conservative assessment of risk by the RBI.

The RBI views this attempt by the BJP led Government to dip into its reserves can drastically impact macro-economic stability. So, the RBI has not accepted the proposed changes, sources said to the Indian Express.

Slamming the Modi-led BJP government over the proposal to seek surplus transfer from RBI to government, Congress president Rahul Gandhi said, “₹36,00,00,00,00,000, That’s how much the PM needs from the RBI to fix the mess his genius economic theories have created. Stand up to him Mr Patel. Protect the nation.”

The Finance Ministry on its part states that the current framework was unilaterally adopted by the central bank in July 2017 because both the central government nominees on the Board were not available during the meeting. The government did not accept this framework and since then has been constantly seeking discussions with the central bank.

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

The finance ministry has also raised objections to the staggered surplus distribution policy (SSDP) of the central bank, under which the RBI transfers its surplus to the government. The ministry’s view is that RBI has been “conservative” and at times “arbitrary,” especially when it came to the transfer of the interim surplus.

Finance ministry proposed that for the year 2017-18, the RBI should transfer the entire surplus amount to the BJP led government after taking capital requirement into account. This is another area where the government and the RBI differ, said the source

In the year 2017-18, the central government transferred a surplus amount of ₹50,000 crore to the government (comprising an interim transfer of ₹10,000 crore), up from ₹30,659 crore in 2016-17, but lower than in the previous three years.

The BJP led government believes that, when compared with central banks around the world, the RBI holds higher total capital as a percentage of its total assets, around 28%.

Countries including the US, 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.

The RBI maintains reserves to cover various risks including market risk, operational risk, credit risk and contingency risk. For the year ending June 2018, Central bank had total reserves of ₹9.59 lakh crore, comprising mainly currency and gold revaluation account (₹6.91 lakh crore) and contingency fund (₹2.32 lakh crore).

RBI Deputy Governor Viral Acharya, in his speech on October 26, said how a transfer of excess reserves from a central bank to government can be drastic, as had been proven in the case of Argentina. The transfer of $6.6 billion of its central bank’s reserves to the national treasury, sparked off the worst constitutional crises in Argentina and led to a grave reassessment of its sovereign risk, Acharya asserted.

The government had tried to defuse the tension in its relations with the Central bank, which worsened over the ministry starting consultations over a range of issues with the central bank under the Section 7 of the RBI Act.