The major contentious issue between the RBI and Narendra Modi’s government is said to be the bank’s refusal to honour a Finance Ministry proposal seeking to transfer a surplus amount of Rs 3.6 lakh crore. The amount will be more than a third of the total Rs 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.
Citing sources the report further stated that the RBI thinks that this move can adversely impact macro-economic stability and therefore said a firm no to the government. So, the RBI has not accepted the proposed changes. The government wanted to use these funds for recapatalisation of PSU banks, who are facing severe crisis due to abnormal growing in non-performing assets.
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, the report said.
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.