To neutralise the mounting apprehension, Garg through his tweets stepped in to quash various news reports claiming that the government is pushing RBI to transfer its surplus reserve and that the RBI is reluctant to part with it to maintain its fiscal deficit, which due to several reasons is likely to breach the target.
While the finance ministry had pointed out that close to Rs 400 crores worth of Rs 500 and Rs 1000 denominations were counterfeit, in the RBI meeting held at 5:30pm that day, the directors noted, "While any incidence of counterfeiting is a concern, Rs 400 crores as a percentage of the total quantum of currency in circulation in the country is not very significant".
The official further added globally there is a reserves cap limit of 14 per cent but government is even ready to accept 20 per cent threshold limit keeping in mind Indian economic and banks' conditions but RBI is keeping a high level of 27 per cent, which should be discussed among members if such high reserves are warranted or not.
Garg did not go into the specifics of what he meant by "fixing" the economic capital framework within three years of its formulation. "You fix what is broke".
Former chief economic adviser Arvind Subramanian had in Economic Survey 2016-17 said the RBI was already exceptionally highly capitalised and almost Rs 4 lakh crore of its capital transfer to the government can be used for recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency.
He went on to say: "What is this jargon put out by the government: "fix the economic capital framework of the RBI"?"
The RBI's equity to asset ratio was 24 per cent as on June 2018.
Sources privy to the developments told CNBC-TV18 that government wants a transparent formula for arriving at capital reserves calculation by the RBI.
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The RBI has been only too keenly aware of these risks. The central bank, however, feels that it needs to retain a share of the profit to make its balance sheet stronger.
The issue may come up at the next RBI board meeting on November 19.
The RBI and the government have not been on the same page on different issues for some months now. "They hardly have the understanding of the central Banks's role and function", he said.
As many as 99.3% of the old Rs 500 and 1,000 notes that were banned overnight in November 2016, were returned, the RBI had said in its latest annual report.
The RBI is now resisting any attempt to slash its capital-to-assets ratio.
Ahead of every union budget, a discussion takes place between the government and the central bank on the surplus capital. If it were to bring it down 14 per cent, it will free up capital around Rs 3.6 lakh crore, the people explained. Out of this sum, almost Rs 7 lakh crore is categorised as revaluation reserves on account of the foreign exchange and bullion it holds.
Former finance minister P Chidambaram had said laying hands on the bank's reserves would have catastrophic consequences. "So, it would seem to be more productive to redeploy some of this capital in other ways".
He provided the answer: "First, for recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency".