Congress President Rahul Gandhi on Tuesday urged Reserve Bank of India Governor Urjit Patel to “stand up to” Prime Minister Narendra Modi to “protect the nation”. Gandhi’s remarks followed a report in The Indian Express that the Finance Ministry had sought the transfer of a Rs 3.6-lakh-crore surplus from the central bank to the government.
The RBI did not accept the proposal, according to the newspaper. The report claims that this is “at the heart” of the ongoing rift between the Centre and the RBI.
Citing the report, and expanding the figure Rs 3.6 lakh crore to list out all its zeroes, Gandhi tweeted: “That’s how much the PM needs from the RBI to fix the mess his genius economic theories have created.”
According to The Indian Express, the surplus of Rs 3.6 lakh crore sought by the government is more than a third of the central bank’s total reserves worth Rs 9.59 lakh crore. The Finance Ministry, in its proposal, suggested that the surplus can be jointly managed by the RBI and the government.
Unidentified officials, however, told the daily that the RBI felt the government’s effort to seek a transfer of the surplus could affect the macro-economic stability and therefore did not accept the proposal.
The Finance Ministry claims that the existing economic capital framework is based on a very “conservative” assessment of risk by the RBI and that the central bank has overestimated its capital reserves requirements resulting in excess capital of Rs 3.6 lakh crore.
Unidentified officials said the government proposed to use the excess capital in consultation with the RBI to recapitalise public sector banks, help them expand their loan books and come out of the Prompt Corrective Action framework.
The Finance Ministry has claimed that the RBI has been “conservative” and sometimes “arbitrary” when it comes to the transfer of the interim surplus. The ministry had thus proposed that from 2017-’18, the central bank should transfer the entire surplus to the government after taking into account its capital requirements.
Congress claims Centre wants to “demolish” RBI
After the news report, Congress spokesperson Manish Tewari claimed on Tuesday that the rift was a “extremely serious and sensitive matter” that could have “very, very severe implications on the sovereignty of India”.
“When speculation mounted, the government in its usual secretive way, came out with a completely inane statement which concealed more than it revealed,” Tewari said about the controversy.
The Congress spokesperson said the RBI had resisted the government’s demand to part with Rs 3.6 lakh crore worth of cash reserves “very strongly”. He called the Centre’s demand “unprecedented”. “If this would fructify, this would be tantamount to the Great Indian Bank Robbery,” Tewari claimed.
The Congress said that the Centre wanted to demolish the confidence of Indian and foreign investors in the central bank, and “demolish the RBI in the process”. The party urged the Centre to heed the experience of Argentina, where the central bank transferred $6.6 billion to the national treasury. The Opposition party claimed that this action sparked a constitutional crisis in the country, forcing Argentina to seek a $50-billion bailout from the International Monetary Fund.
Speculation about a rift between the government and the central bank began when RBI Deputy Governor Viral Acharya, on October 26, said that governments that do not respect a central bank’s independence sooner or later incur the wrath of financial markets. Three days later, Reuters reported that the Centre was upset with the RBI for publicly talking about the rift.
Senior officials said the government fears the rift could tarnish the country’s image among investors. An unidentified official in the Prime Minister’s Office told Reuters it was “very unfortunate” that RBI took the matters public. The official said Patel may face a tough time when he appears before a parliamentary standing committee on November 12.
Even before this, government officials had called for the RBI to relax lending restrictions on some banks, and the RBI had opposed a suggestion by an inter-ministerial committee to set up an independent regulator for payment systems.
Last week, reports claimed that the government had initiated talks with the central bank to invoke Section 7 of the Reserve Bank of India Act, which could empower it to issue directions to the central bank on certain matters. This was seen as an escalation of the tussle between the government and the RBI. The Finance Ministry issued a statement in support of the central bank’s autonomy, but did not comment on the reports.