"If the RBI either defies the government or RBI governor resigns, in either event, the outcome will be catastrophic", he added. The disagreements came out in open when RBI deputy governor Viral Acharya, in a hard-hitting speech, said failure to defend the central bank's independence would "incur the wrath of the financial markets".
The RBI distributes a part of the profits it generates as dividends to the government while transferring the rest to its reserves.
The Act would have to be amended for the RBI to start transferring its surplus from previous years to the government, Malegam told CNBC-TV18 in an interview, as it only provides that all of the central bank's surplus in a year, after provisions, should be transferred.
The Economic Affairs Secretary Subhash Chandra Garg on Friday refuted reports of a Finance Ministry proposal asking the Reserve Bank of India to transfer 3.6 lakh crore to the government saying that these were misinformed speculation in the media, and the government's finances were right on track.
RBI sources confirmed that the issue of fixing the norm on surplus reserve did figure in the recent communication between the government and the RBI. The statement from North Block comes ahead of the RBI's November 19 board meet, which is expected to take up the unfinished agenda of last month's meeting that had ended in a stalemate.
"The government stares at a fiscal deficit crisis".
Most central banks around the world keep 13 per cent to 14 per cent of their assets as reserve, compared with the Reserve Bank's 27 per cent, the official said. He is also a former chairman of the Institute of Chartered Accountants of India. However, the government completely rejected the report that it had "asked for transferring of the surplus" or fixed Rs 3.6 lakh crore target for the RBI to transfer.
Earlier this week, the Indian Express had reported that the alleged rift between the Centre and the RBI was because of a proposal by the Finance Ministry.
Economic capital framework refers to the capital required by the central bank while taking into account different risks. The government wants to step up the expenditure in an election year.