oppn parties The Government And The RBI: Striking A Prudent Balance

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PM Modi to address more than 50000 people at the Howdy Modi event in Houston today where he will be joined by the US president Donald Trump
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The Government And The RBI: Striking A Prudent Balance

By Sunil Garodia

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Writes for a number of publications.

The government has had its way with the RBI. The central bank has transferred a record sum of Rs 1.76 lakh crore to the government comprising Rs 1.23 lakh crore as the dividend for the year 2018-19 and the balance after revising the Economic Capital Framework (ECF) to lower the optimum reserves required to be maintained by the RBI. This has ensured that the government will now have the funds required to make investments in infrastructure and other projects and schemes and kick start the moribund economy. The need was to strike a prudent balance between the government's need for funds in the present depressed economic conditions and the optimum requirement of reserves to be kept with the RBI in case the situation worsens and it has to intervene in the financial markets. It seems that the government, the RBI and the Bimal Jalan committee have worked out an excellent formula.

It was widely expected that the RBI would transfer around Rs 70000 crores from the profits earned this fiscal to the government and transfer the rest to the reserve fund. But it ended up transferring the whole of the profit earned this year to the government. This happened because the government managed to convince the Bimal Jalan committee of the need for a downward revision in the ECF. It adopted a new methodology to show the committee that the RBI was covered up to 99.5% of market risks against the global standard of 90% by most central banks. Once the committee was convinced and the RBI's Central Board, despite reservations by some members, adopted the committee's recommendation in full, the ECF was adjusted to release Rs 52,637 crore to the government and it also obviated the need to transfer any amount from this years' dividend to the reserve fund.

Readers will remember that the former RBI governor Urijit Patel had ostensibly resigned from his post mainly because he could not agree to the transfer of additional funds to the government from the surplus reserves held by the RBI. His argument was that the bank needs the funds to intervene in the market in times of global crisis. Readers will also remember that India had to pledge its gold reserves and physically ship the same to the Bank of England to raise funds to prevent a payments crisis in the 1990s. But the situation is not as bleak as it was then and the RBI held a reserve of Rs 9.6 lakh crore at the end of FY 2018. India has foreign exchange reserves of $430.5 billion and is comfortable in the balance of payments also. Given the above indicators, the Bimal Jalan committee was right in accepting the arguments put forward by the government and the RBI has acted correctly in releasing additional funds in times of economic crisis.