Behind govt-RBI rift: DEA's insistence on Rs 3.6-trillion excess capital

The tussle between the Reserve Bank of India (RBI) and the government may have reached its breaking point when the Finance Ministry’s Department of Economic Affairs (DEA) claimed that the central bank should transfer Rs 3.6 trillion in excess capital to the government.

The RBI transfers a surplus from its balance sheet to the Centre every year as dividend. For its July 2016-June 2017 fiscal year, it had transferred Rs 306 billion of its surplus to the government. Economic Affairs Secretary Subhash Garg publicly asked the RBI for another Rs 130 billion from its contingency reserves to take the total surplus for the year to Rs 430 billion. On March 27, four days before the end of the 2017-18 fiscal year, it transferred Rs 100 billion extra to the government, which came from its July-June 2017-18 fiscal year. For that year, the RBI has said it will transfer Rs 500 billion.

In August, however, an internal finance ministry note, originating from the DEA, took the whole issue to uncharted waters. In the note it was laid out how the government feels that is getting a lower surplus from the RBI as the central bank is extremely conservative in its assessment of its capital buffers to meet market risks. The RBI calculates its capital needs based on “stressed value-at-risk” valuations, while the government wants the central bank to use just “value-at-risk”, which most other central banks use. By that model, the RBI should transfer Rs 3.6 trillion.

It has now been confirmed that one of the three strongly worded letters from the DEA to the RBI focused on additional transfers. All three letters referred to the Section 7 of the RBI Act. Essentially, the government was ready to invoke Section 7 and direct the RBI to transfer the Rs 3.6 trillion, if it did not do so voluntarily. The other points of contention for which Section 7 was referred to were easing of Prompt Corrective Action (PCA) norms and concessions for power sector non-performing assets. All three letters are reportedly drafted by Garg.

“The government should not look to dip into the RBI’s reserves. Just make do with the surplus that the central bank transfers in the course of a year, and try to meet the fiscal deficit target within your means. In such situations, one needs to compromise and meet at a halfway point. If the government had backed down and stopped asking for additional surplus, perhaps the RBI could have compromised on other issues such as the PCA norms and power sector NPAs,” said a former bureaucrat.

Business Standard has learnt from sources that not only did the DEA refuse to compromise on the issue of surplus, but was equally adamant on other issues, even though the PCA norms, power sector NPAs, the Punjab National Bank scam, and some other points of contention are handled by the Department of Financial Services in the finance ministry.

Finance Minister Arun Jaitley does not communicate too frequently with RBI Governor Urjit Patel and the deputy governors, with whom he is known to share a cordial relationship. The informal channels of communication, which have existed between North Block and Mint Road, are currently handled primarily by DEA’s Garg and Financial Services Secretary Rajiv Kumar from the finance ministry’s side. 

The buzz in bureaucratic circles is that whether through written communication or informal channels, instead of negotiating on contentious issues, the North Block tried to force its writ upon the RBI. This is what prompted the RBI Deputy Governor Viral Acharya to make his now “infamous” speech last Friday, wherein he indirectly attacked the government for trying to impede the central bank’s independence.

In fact, in the last RBI board meeting on October 23, Garg and Patel are said to have had heated exchanges, a source said. The meeting ended inconclusively, with a lot of issues —now out in the open — which were supposed to be discussed were left unresolved. Garg and Kumar are the finance ministry’s representatives on the RBI board.