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Modi govt trying to capture RBI could be catastrophic: Chidambaram

10 November 2018

The Congress party had latched on to the issue with former finance minister P Chidambaram accusing the government of demanding Rs 1 lakh crore from the reserves of the central bank to accelerate spending against the backdrop of a tight fiscal situation.

Arvind Subramanian, former chief economic adviser to the government, had argued in his Economic Surveys that the central bank was sitting on too much capital and "assuming that the RBI returns four trillion rupees of capital to the government" it could be put to productive use.

Without acknowledging that the notices have been sent to the RBI, the Union finance ministry had said the "autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement".

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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 RBI was reported to be against the proposal. That framework is used to decide the adequate amount of reserves the central bank should maintain.

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"The government stares at a fiscal-deficit crisis". The sources said the government was not seeking funds transfer to bridge the deficit but was seeking transparency in operations.

Friday's statement, said economist and Mint columnist Indira Rajaraman, "seems to indicate that the government is looking to allay market fears". The government wants to step up the expenditure in an election year.

"In principle, the RBI should have on hand some internally worked out calculations of the optimal level of the three kinds of reserves in the RBI balance sheet", she said. The global norm sets 14% of the GDP to be kept in reserve by the central bank.

These are valuation reserves 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.

Modi govt trying to capture RBI could be catastrophic: Chidambaram