Govt wants RBI to transfer its surplus of Rs 3.6 lakh crore; central bank believes move will impact macroeconomic stability

The finance ministry reportedly wants Reserve Bank of India (RBI) to transfer a surplus of Rs 3.6 lakh crore and believes that the central bank’s capital requirements and terms for the transfer of its reserves to the government are based on a very “conservative” assessment of risk, a media report said. This would amount to more than a third of the total Rs 9.59 lakh crore reserves of the central bank, to the government, the report said.

The RBI, however, is opposed to this view and believes that the government’s request for transfer surplus can adversely impact macroeconomic stability, The Indian Express reported . The central bank is of the view that the use of its reserves will hurt the government’s commitment to fiscal prudence.

Last month, RBI deputy governor Viral Acharya said undermining a central bank’s independence could be “potentially catastrophic”, in comments appearing to push back against government pressure ahead of a general election next year.

The government recently called for the RBI to relax its lending restrictions on some banks, and Centre has also been trying to trim the RBI’s regulatory powers by setting up a new regulator for the country’s payments system.

Acharya had said that more needed to be done to ensure effective independence for the central bank in its regulatory and supervisory powers.

He also noted in his address to top industrialists that the Argentine government’s meddling in its central bank’s affairs in 2010 led to a market revolt and a surge in bond yields. “The risks of undermining the central bank’s independence are potentially catastrophic,” said Acharya, adding that rash moves could trigger a “crisis of confidence in capital markets that are tapped by governments and others in the economy.”

Last week, continuing with the institutional push against government wishes, RBI deputy governor NS Vishwanathan dismissed calls for lowering capital adequacy norms for the lenders and match with global levels. He also described the 12 February circular for NPA recognition as a “landmark reform”, just like the passage of the Insolvency and Bankruptcy Code.

Two of the contentious issues behind the ongoing spat between the government and the central bank which of late has reached historic lows, has been North Block’s call for addressing the liquidity crunch. One way to address is, according to finance ministry mandarins,  is lowering the capital adequacy norms, which will push more lendable money to the system.

The government has also been pushing for relaxing the new non-performing assets (NPAs) recognition norms selectively. But the monetary authority has so far been resisting any such push.

With inputs from agencies