Govt. denies move to seek ₹3.6 lakh cr. from RBI

What is Important?
UPSC perspective:
Prelims:Key facts
Mains:Govt- RBI autonomy issues

Why in News?

Dismissing reports of the government seeking ₹3.6 lakh crore from the Reserve Bank of India (RBI) as speculation, Economic Affairs Secretary Subhash Chandra Garg on Friday said that the only proposal under discussion is to fix an appropriate economic capital framework for the central bank.

Key facts:

*The government and the RBI have been at loggerheads on several issues, including a proposal for the central bank to transfer a portion of its surplus reserves to the government.
*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.
*The RBI views this attempt by the Government to dip into its reserves can adversely impact macro-economic stability.
*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.
*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.
*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.

Core Issue

*The government has only initiated consultations with RBI on different issues under Section 7 (1) and not invoked it.
The govt has send written consultations to the RBI citing Section 7, without actually implementing it.
These letters were to do with the Centre’s desire for the:
*Power sector’s NPAs to be reclassified
*Issue of RBI’s dividends to the Centre and desire for easing the PCA norms so as to increase lending to the MSME sector

Income Source of RBI:

A Central Bank is primarily meant to promote the financial and economic stability of the country.
The Central Bank of a country promotes economic growth and stability and controls inflation.
The majority of the income comes from:
*The returns it earns on its foreign currency assets, which are either in the form of bonds and treasury bills of other Central Banks like Federal Reserve of USA.Also earns money through Open Market Operations, which it undertakes regularly to manage liquidity.
 *The RBI can also invest in top-rated securities across the World.Also earns money by lending to banks for very short tenures, such as overnight repo.
 *RBI has also been more active in the forward currency markets and it also earns income this way also.

Expenditures of RBI:

*The main Expenditure of RBI is Printing of currency notes. (Recently Demonetisation made to printing of new currency)
 *It gives commission to the banks for the operation of accounts of State Govts and Central Govt. by various commercial banks on its behalf.
*Interest to be paid, when it undertakes reverse repo operations.

Relationship framework work in India:

*The risk management framework adopted by the RBI board indicates the level of equity the RBI needs, given the risks it faces.
*The dividend policy then becomes a technical matter of how much residual surplus is available each year after bolstering equity. “Frameworks reduce the space for differences.
*Clarity would be useful on when RBI should issue a warning on fiscal profligacy rather than be seen as interfering in the legitimate decisions of elected representatives

Way Forward

*Former Governor Y V Reddy had noted that the government has powers to give directions.
*But, in giving directions also, unlike other statutes, consultation with the Governor is necessary in regard to the RBI before issuing the directions.
*Independence to the central bank is granted by the government with a specific purpose.
*Experience has also shown that trust and confidence will improve if the spending authority, viz., the government is separate from the money creating authority, that is, central bank or monetary authority.

Govt. denies move to seek ₹3.6 lakh cr. from RBI Govt. denies move to seek ₹3.6 lakh cr. from RBI Reviewed by The Hindu Current Affairs on November 10, 2018 Rating: 5

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