Economic capital framework refers to the capital required by the central bank while taking into account different risks.
The government and Reserve Bank of India (RBI) have a week to go before a showdown takes place in the central bank's Board meeting on November 19.
In what looks like easing of tensions, the government has denied making any proposal to RBI asking to transfer Rs 3.6 or 1 lakh crore surplus. The denial comes after days of speculation.
Further, "Discussions are underway with the RBI to decide the appropriate economic capital framework of the central bank," Subhash Chandra Garg, secretary of the department of economic affairs, ministry of finance, said on Twitter.
The statement comes at a time when the government and RBI are at loggerheads over a range of issues, including norms regarding weak banks, the liquidity problem faced by non-banking finance companies (NBFCs), as well as pressures on the central bank to transfer more of its surplus to the government.
Former RBI board member YH Malegam told CNBC TV18 that there is no provision in the RBI Act that says the central bank's reserves can be paid to the government. However, the Act would have to be amended for the RBI to start transferring its surplus from previous years to the government.
Every year, the central bank, after making provisions for bad debts, contribution to staff, depreciation of assets and superannuation funds, transfers balance of its profits to its owner i.e. the government.
However, there is no standard benchmark followed by the RBI for the transfer so far.
Ahead of every union budget, a discussion takes place between the government and the central bank on the surplus capital. Thereafter, the surplus expectations are put in the budget by the government, while the central bank comes out with the announcement on the amount to be transferred in August after doing its calculations.
Economic capital framework refers to the capital required by the central bank while taking into account different risks. Once this is finalised, excess reserves could be transferred to the government, providing the latter with a fiscal cushion.
In FY18, the RBI had transferred Rs 50,000 crore surplus in two installments, Rs 10,000 crore in March 2018 and the remaining amount in August. This was over 63 percent higher than the Rs 30,659 crore which it transferred a year back.
Amid speculation of RBI Governor Urjit Patel's likely resignation, the meeting of the central board of the RBI on November 19 is likely to be stormy.
In a speech in late October, RBI deputy governor Viral Acharya batted for autonomy of the RBI and "effective independence" of the RBI. He said, “Having adequate reserves to bear any losses that arise from central bank operations and having appropriate rules to allocate profits (including rules that govern the accumulation of capital and reserves) is considered an important part of central bank’s independence from the government."
The reserves in the RBI balance sheet are used for dealing with volatility in foreign exchange holdings and government securities, asset development reserves for taking care of depreciation and other asset-related costs, and a contingency reserve to take care of any unforeseen emergencies.As of June 2018, the total amount in dealing with these three types of reserves exceeded Rs 9 lakh crore with more than Rs 6.9 lakh crore in valuation reserves, RBI’s annual accounts data showed.