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The Reserve Bank of India has reserves of £ 159 trillion, of which the government would require GBP 3.6 trillion to deal with the liquidity crisis in India. Photo: Reuters
New Delhi: The meeting of the Reserve Bank of India (RBI) board of directors on November 19 should be a stormy affair in the context of the fierce struggle between the government and the central bank, said people familiar with the development, adding that some members may raise issues relating to the capital framework, surplus management and liquidity measures for MSMEs.
Tensions between the RBI and the government have recently intensified. The Ministry of Finance opened the debate under Article 7 of the 1934 Reserve Bank of India Act, which had never been used before, which empowers the government to issue instructions to the governor. of the RBI.
RBI deputy governor Viral Acharya had spoken in a speech last month about the independence of the central bank, saying any compromise could be "potentially catastrophic" for the economy.
According to the people aware of the problem, the meetings of the board of directors of the RBI are pre-decided and the agenda is also distributed much in advance. However, board members may raise off-agenda items at the meeting. The public said that the government-appointed directors and a few independent directors could raise the issue of the interim dividend as well as the capital framework of RBI.
However, any changes to the economic capital framework for economic capital can only be made after the RBI Act has been amended.
The alignment of standards on capital adequacy with those of advanced countries and a certain relaxation of the framework of rapid corrective measures (PCA), added the deputies, adding that other measures to strengthen loans to MSMEs and NBFC could also be discussed.
RBI applies conservative capital adequacy standards, which are stricter than those applied in advanced economies, which leads banks to retain more venture capital reserves to protect their loans.
The government is of the opinion that if the RBI lined up on the world average, it would free up bank capital that could be used to increase lending to the productive sectors, the population said.
Earlier this month, RBI deputy governor N.S. Vishwanathan rejected calls for lowering lender capital adequacy standards and adapting them to global levels.
Vishwanathan explained that the capital requirements are high for domestic lenders due to higher default / bad loan rates, pointing out that lowering capital standards simply to align them with the standards would create strong banks.
Regarding the capital framework, the government said on Friday that it was discussing the "appropriate" size of the capital reserves that the central bank must maintain as it denied having sought a transfer of capital. massive central bank.
The RBI has reserves of 950 billion pounds sterling and the government wants the central bank to separate a third of that amount.
The Secretary of State for Economic Affairs, Subhash Chandra Garg, had stated that the government did not urgently need funds and that there was no proposal to ask the RBI to transfer $ 3.6 trillion. The government, he said, is on track to reach the target of 3.3 percent of GDP set for the fiscal deficit for the 2018-19 fiscal year.
"There is no proposal to ask RBI to transfer 3.6 or 1 lakh crore, as speculated," he had tweeted.
"The government's fiscal deficit (DF) for 2013-2014 was 5.1%. From 2014-2015, the government has managed to reduce it considerably. We will end the fiscal year 2018-19 with a DF of 3.3%. The government has in fact renounced 70 billion euros in market debt this year, "added Garg, adding that the only proposal" was under discussion to set a capital framework. " appropriate cost for the RBI ".
According to the experts, the "economic capital framework" includes the transfer of excess reserves to the balance.
Arvind Subramanian, a former senior economic adviser, said in the 2016-2017 Economic Survey that his outstanding funds were already highly capitalized and his cash transfers to the government could reach nearly £ 4,000. However, this proposal never came into being.
On Sunday, the union's former finance minister, P. Chidambaram, asked the Center what was his "hurry" to "repair" the RBI's capitalist framework while the power dispensation had more than four months to complete his term.
"The NDA government competed for 4 years and 6 months of its mandate. It remains effectively 4 months. What's the hurry to decipher to "fix" RBI's capital framework? He tweeted.
This story was published from a news agency thread without text modification. Only the title has been changed.
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