NEW DELHI: The current level of currency reserves held by RBI is necessary in view of international volatility and to maintain high creditworthiness, governor Urjit Patel told a parliamentary committee on Tuesday, indicating that the Centre may not receive higher cash transfers soon.
“These reserves are meant to be used during periods of stress and not for meeting normal needs”, sources quoted Patel telling the finance standing committee.
The governor’s comments to the committee are significant as the issue of the level of reserves to be maintained was one of the major flashpoints in a bitter battle between the central bank and the government.
This is the first time Patel has commented on the issue since
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+ of the standoff between the RBI and government.
The RBI has contended that a large part of the reserves — estimated at around Rs 9.7 lakh crore or around 28% of its assets — are notional and should not be disturbed.
At last week’s board meeting, the RBI brass agreed to define what will constitute appropriate level of reserves that the central bank may hold but the decision on a higher transfer will apply only to future accretion and that too if a committee recommends it.
The panel is to be jointly set up by the finance ministry and RBI.
Patel’s remarks are seen as reflecting RBI’s stance that the current level of reserves are needed to guard against shocks such as oil prices, depreciation of rupee or exit of foreign investors from the stock market.
Last week, finance minister Arun Jaitley said the Centre’s fiscal position is comfortable and it doesn’t need a cash transfer from RBI. Even on Tuesday, Patel told the parliamentary committee there was no stress in the economy.
‘Impact of DeMon transient’
Tuesday’s standing committee meeting saw a lot of questions being hurled at Urjit Patel by Opposition MPs such as Trinamool leaders Saugata Roy and Dinesh Trivedi and Congress’s Digvijay Singh over the “erosion” of RBI’s autonomy in the light of the recent tensions with the government. Patel indicated that he would submit written responses in a couple of weeks.
BJP MP Nishikant Dubey sought to counter the opposition MPs, arguing that a Financial Stability and Development Council was set up by the Manmohan Singh government, pointing towards the former PM who was among the attendees.
A discussion on the level of reserves was among a clutch of issues taken up by the Centre with RBI. The government wanted a softening of the prompt corrective action (PCA) framework for weak banks, which it thought was leading to a credit squeeze as also specific measures to help small and medium enterpirses seen to be struggling and steps to help non-banking finance companies deal with a liquidity crisis.
The panel also discussed the effects of demonetisation, with Patel maintaining that its effects were transient and the measure was followed by a rise in digital transactions and healthy credit growth. Patel said the cash-GDP ratio was below what it was earlier, credit flows had risen to more than 15% and inflation was well under control at around 4%. Figures released by RBI on Tuesday showed that bank support to the corporate sector was Rs 97,325 crore as on November 9, a rise of 15.6% year on year.
The MPs on the panel sought to probe the RBI governor on the recent discussions with the government, but Patel is understood to have said that he would respond in writing in about two weeks. The meeting was attended by several MP and former minister and Congress leader Veerappa Moily is the chair.