RBI-Govt tussle on transfer of RBI reserves

The Modi government is now at loggerheads with the Reserve Bank of India (RBI) over the transfer of the central bank’s reserves to the government. As performer RBI board member Y H Malegam, the RBI Act does not provide for the payment of RBI’s reserves to the government, yet the Modi government is eyeing to lay its hands over one-third of RBI’s total reserves amounting to Rs 9.6 lakh crore.

According to Malegam, the Act provides for the transfer of central bank’s entire surplus in a year, after provisions, to the reserves. Therefore, the government will have to amend the Act so that the RBI can transfer its surplus from previous years to the government.  Under the current provision of the Act, the RBI pays a part of its profits to the government as dividend every year and transfers the balance surplus to its reserves.

However, the RBI is in no mood to bow to the government’s wishes and so the stand-off between the two continues. The RBI has good reason not to part with its reserves as it wishes to bolster its balance sheet by having sufficient reserves and to present a strong picture of the Indian currency.

The fact that the Modi government has to try to pressurise the RBI to give away a part of its surplus despite there being no such provision in the RBI Act, could be an indication that the government may be in a precarious financial situation.