The centre seems to have toned down its demand from the RBI to hand over a part of its excess capital. This is among the half-a-dozen issues over which the Centre and the RBI are at loggerheads.
While the Centre has denied seeking any surplus capital, the Chief Economic Affairs Secretary, Subhash Garg, has said the government is talking to the RBI for fixing an appropriate capital framework for it. This is possibly a middle ground for the Centre and the RBI. Once this is done, it will become easier for the Centre to tap the RBI's capital.
Experts say there is little merit in the government's argument of 'surplus capital' and it shouldn't rob the RBI of its savings. The RBI has been handing over its entire surplus of over Rs 50,000 crore to the government every year. The reserves retained after transferring the surplus act as a shock absorber for events like the global financial crisis of 2008. There may be a lingering danger for India as the Fed starts unwinding its balance sheet. The RBI's Rs 9 lakh crore reserves are under various heads. The contingency fund is for meeting losses out of monetary policy and forex operations. The Asset Development Fund is to meet needs of internal capital expenditure to invest in subsidiaries/associate companies.
Not many know that the RBI holds 15 per cent of government securities that are exposed to mark-to-market losses. One of the RBI's main functions is to act as a lender of last resort for market participants. For decades, governments at the Centre have exploited LIC as a lender of last resort. This still continues as the Rs 22 lakh crore Union Budget is not enough to meet its growing expenditure. Two years ago, the Centre had unsuccessfully attempted 'demonetisation' of high currency notes to leave a surplus of Rs 4-5 lakh crore. Early this year, the Centre used the recapitalisation bond issue of Rs 1.35 lakh crore route to support state-owned banks.
@AnandAdhikari