Law doesn't allow transfer of RBI reserves to govt: YH Malegam

Darnell Taylor
November 10, 2018

The controversy over the transfer of surplus reserves started when RBI Deputy Governor Viral Acharya, in his speech on October 26, quoted Alberto Ramos, Argentinian analyst at Goldman Sachs, as saying, "Using central bank reserves to pay government obligations is not a positive development and the concept of excess reserves is certainly open to debate".

Malegam was on the RBI board for 17 years and has chaired several committees for the central bank. The government's fiscal math is completely on track.

If RBI Governor Urjit Patel stands his ground, the Centre was planning to issue a direction under Section 7 of the RBI Act, 1934, directing the apex bank to transfer Rs 1 lakh crore to the government's account, he claimed.

The matter is pending before the board of the Reserve Bank of India and is likely to be taken up again at its next meeting likely on 19 November, the official told reporters, asking not to be identified citing rules. The government wants to step up the expenditure in an election year. "A thorny ongoing issue on this front has been that of the rules for surplus transfer from the Reserve Bank to the government..."

Most central banks around the world keep 13 per cent to 14 per cent of their assets as reserve, compared with the Reserve Bank's 27 per cent, the official said.

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Garg's tweet came in response to news reports that the government is asking the RBI to transfer a part of its reserve to maintain its fiscal deficit.

Sources say that transfer of surplus reserves also figured in the Economic Survey crafted by former Chief Economic Adviser Arvind Subramanian, who batted for RBI transferring over Rs 4 lakh crore to the government.

Garg added that the only proposal concerning the reserves that the government was discussing was to fix the appropriate economic capital framework of the RBI.

RBI and the central government are now involved in a standoff and according to various reports, a major bone of contention between the two is that the government wants the central bank to part with a third of its Rs 9.6 lakh crore reserves.

Earlier this week, the Indian Express had reported that the alleged rift between the Centre and the RBI was because of a proposal by the Finance Ministry.

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