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

News Snippets

  • In reply to a question in Parliament, the government says it is empowered to lawfully intercept, monitor or decrpyt information stored in a computer resource in the interest of sovereignty or integrity of India
  • Police stop a 12-year old girl on her way to the Sabarimala shrine
  • In Karnataka, the JD(S) indicates that it might support the BJP government if it falls short of numbers after the bypolls
  • Congress pips the BJP in local body elections in Rajasthan, winning 961 wards to the BJPs 737
  • After Airtel and Vodafone-Idea, Jio also indicates that tariffs will be raised from December
  • Sources in Shiv Sena say that they might revive the alliance with the BJP if it offers the 50:50 deal
  • A miffed Sanjay Rout of the Shiv Sena says that it will take "100 births" to understand Sharad Pawar
  • Mobile operators Vodafone-Idea and Airtel decide to raise tariffs from next month
  • Sharad Pawar meets Sonia Gandhi and says more time needed for government formation in Maharashtra
  • Justice S A Bobde sworn in as the 47th Chief Justice of India
  • Supreme Court holds hotels liable for theft of vehicle from their parking area if parked by valet, says "owner's risk" clause is not a shield from such liability
  • Finance Minister says she is receiving feedback from many sectors that recovery is happening as there is lower stress
  • Sabarimala temple opens, but police bar the entry of women below 50 years
  • Finance Minister Nirmala Sitharaman says Air India and BPCL to be sold off by March
  • Media person Rajat Sharma resigns as DDCA president
Two Muslim litigants in Ayodhya refuse to accept the Supreme Court order, say review petition might be filed
oppn parties
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.