The
government and the RBI are in an intense tussle over the use of the central
bank’s ‘capital’.
Why central bank
needs capital?
As
a bank, the RBI performs several financial transactions one of which is
providing liquidity to commercial banks.
The RBI also gives loans to the central and state governments. For such
an operation, the RBI needs capital. As per the Annual Report 2018, the RBI has
assets worth Rs 36.2 lakh crores whereas its capital is around 9.59 lakh
crores. So, the capital as a percent of the assets is around 27%.
Why the government
need capital reserves of the RBI?
The
government needs funds to solve the Rs 9 lakh crore bad debt problem. And no
source is visible, given the huge amount of money required. Hence government
wants some value of RBI’s capital reserves.
What is the tussle
all about?
The
RBI has adopted a strong opposition to the government demand. The reasons for
RBI’s objections are based on three arguments:
(1)
RBI needs funds to manage macroeconomic risks including financial stability
risks.
(2)
Use of RBI funds to finance fiscal deficit is undesirable.
(3)
Capital reserve of RBI is related with the autonomy and independence of the
central bank.
As a result, government is forcing to conduct a meeting with RBI director board to decide over the excess
capital reserves.Thank You
Regards
Kautilya
IBS Mumbai
Comments
Post a Comment