The November 19 board meeting of the Reserve Bank of India will likely see a sharpening of the standoff with the Finance Ministry, with the government making clear its intent to press for fixing norms for the surplus reserves to be maintained by the central bank.
“The global norm is to have reserves of 14 per cent of total assets, while at present the RBI has 27 per cent. There need to be some norms for how much the RBI can keep,” a top Finance Ministry official told BusinessLine . This issue figured in the recent communication between the government and the RBI — and although the government has said it was not asking for a part of the surplus reserve to be transferred to it, the general feeling is that the fixing of a norm is the precursor to a transfer.
Earlier in the day, Economic Affairs Secretary Subhash Chandra Garg tweeted, “….proposal under discussion is to fix appropriate economic capital framework of RBI.” The phrase ‘appropriate economic capital framework’ is being interpreted to mean ‘determining the norms for surplus reserve to be maintained’.
Garg’s tweet came in response to news reports that the government is asking the RBI to transfer a part of its reserve to maintain its fiscal deficit. “Government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer ₹3.6 or 1 lakh crore, as speculated,” he said.
‘Fiscal deficit under control’
He mentioned that the government’s fiscal deficit in financial year 2013-14 was 5.1 per cent. From 2014-15 onwards, the government brought this down substantially. “We will end FY2018-19 with a fiscal deficit of 3.3 per cent. The government has actually foregone ₹70,000 crore of budgeted market borrowing this year,” he emphasised.
Officials in the know said the communication between the government and the RBI did not mention any amount to be transferred and only raises the issue about norms.
According to the RBI annual report, surplus reserves as on June 30, 2018 were about ₹9.63-lakh crore. This comprises balances in Contingency Fund, Asset Development Fund (ADF), Currency and Gold Revaluation Account (CGRA), Foreign Exchange Forward Contracts Valuation Account (FCVA) and Investment Revaluation Account Rupee Securities (IRA-RS), besides some minor accounts.
The controversy over the transfer of surplus reserves started when RBI Deputy Governor Viral Acharya, in his speech on October 26, quoted Alberto Ramos, Argentinian analyst at Goldman Sachs, as saying, “Using central bank reserves to pay government obligations is not a positive development and the concept of excess reserves is certainly open to debate. It weakens the balance sheet of the central bank and provides the wrong incentive to the government, as it weakens the incentive to control the rapid expansion of spending and to promote some consolidation of fiscal accounts in 2010.”