New Delhi: The finance ministry wants to sign a Memorandum of Understanding with the Reserve Bank of India that will fix, for the next 3-4 years, the formula for calculating the capital the central bank needs, a senior ministry official has said. The ministry wants the formula to be based on ‘Value at Risk’ with 99% confidence interval, the official told Cogencis.
Currently, the RBI calculates its capital needs based on ‘stressed value-at-risk’. “The current formula of stressed value-at-risk at 99.99% confidence interval is too conservative. It’s almost like preparing for an asteroid to hit earth,” the official said.
If the RBI uses models followed by other central banks, which is value-at-risk at 99% confidence level that the government claims is highly conservative by itself, the central bank will have about 3.6 trillion rupees in excess capital, the official said.
The government will announce the formation of an expert panel to look into the RBI’s economic capital framework by end of this week, the official added. “Once the expert panel has studied the global practices on how much capital central banks keep to meet unforeseen risks, we will propose an agreement for at least three years to fix a formula for capital framework,” the official said. The finance ministry wants to institutionalise the framework to eliminate any uncertainty in the process of surplus transfer and capital requirements of the central bank, the official said.
WANTED: INTERIM DIVIDEND
To bridge the budgetary gaps before the general election next year, the government on Wednesday said it will seek an interim dividend from the Reserve Bank of India for this fiscal year, a government official privy to the developments told CNBC-TV18. In the financial year 2017-18, the RBI had made a surplus transfer of Rs 50,000 crore to the government (which comprised an interim transfer of Rs 10,000 crore). It was higher than Rs 30,659 crore in the previous financial year 2016-17, but lower than in the previous three years. Under the RBI Act, 1934, the central bank is required to pay the government its surplus after making provisions for bad and doubtful debts, depreciation in assets and, contribution to staff and superannuation fund among others.
There is yet another sticking point between the RBI and the Centre: who will head the expert committee to review the central bank’s economic capital framework? The buzz is that the government wants former RBI governor Bimal Jalan to head the committee, while the central bank has suggested the name of former deputy governor Rakesh Mohan for the post.
Mohan is a strong votary of maintaining central bank autonomy on issues of capital policy. Jalan, on the other hand, feels the central bank must be accountable to the government. In a recent interview, Jalan did not comment on whether RBI contingency reserves could be used by the government but said it would depend on the urgency and the possible impact of the contingency fund on the financial sector.
RBI’s deputy governor from 2002-2004 and 2005-2009, Mohan has worked with Jalan briefly in his first tenure. He recently wrote that the central bank’s reserves must remain strong for the economy’s functioning. He further wrote that “raiding RBI’s capital would create no new government revenue on a net basis over time and it provides an illusion of free money in the short-term”.
He added that any transfer will “erode whatever confidence that exists in the government’s intention to practice fiscal prudence” and it will cost RBI its credibility in the financial markets. Mohan said there must be discussion over whether RBI’s capital is excessive.
