First, RBI deputy governor Viral Acharya delivered a speech warning the government that asking the central bank to part with its reserves would have market consequences. Thereafter, Indian Express reported the government was pressing RBI to pay a whopping Rs 3.6 trillion out of its total Rs 9.6 trillion reserves. Then the government clarified it wasn’t asking for Rs 3.6 trillion but only proposing to fix an appropriate economic capital framework of RBI. But the “intent” is now quite clear—the government wants to lay its hands on a large chunk of reserves that it thinks is “surplus capital”. At stake are two questions: One, can the government, as the owner of the central bank, force the Governor to pay out its reserves? Many expert opinions have jumped in support that the sovereign has every right to invoke Section 7 of the RBI Act and direct the central bank to pay up, implying it can withdraw as much capital as it wants—maybe even leave just a bare minimum of Rs5 crore original capital contribution as per RBI Act 1934! That is certainly not the intent however, which leads us to the second question, by how much? This is what the government is alluding to—fix an appropriate economic capital framework, and thus estimate the surplus that it could lay its hands on.
But who should decide on a sensitive issue that has far reaching macro-stability consequences as former Governor Raghuram Rajan recently explained in several interviews? Press reports indicate this could be discussed at the forthcoming board meeting scheduled for November 19. Can RBI board members, outside RBI, with hardly any expertise or experience in macro-stability policymaking, delve into such an issue? If they do and force RBI to pay up, it would be setting a dangerous precedent. Any future government could follow suit, asking for more!
RBI’s current policy of paying dividend to the government is already based on recommendations given by Malegam Technical Committee-II with domain knowledge. Accordingly, it transferred 100% profits for three years beginning FY14. The present government wanted more; the Economic Survey 2015-16 made the case that RBI had significant excess reserves that could be used to recapitalise public sector banks [Box 1.6: Addressing the Twin Balance Sheet Challenge, page 19: Economic Survey, 2015-16]. The government could have set up another expert committee then itself to examine an “appropriate economic capital framework of RBI” for recommendations. Why is it rushing towards this hara-kiri just before a general election?
Source: Financial Express, November 13, 2018