Dissecting RBI's surplus transfer to the government

Many were of the view that the transfer by the RBI to the Centre would set a precedent and as such can be viewed as a threat to its autonomy. Others saw this as a valuable use of RBI’s excess reserves.

Aug 28, 2019 10:08 IST India Infoline News Service

Shaktikanta Das
Earlier this week, the Reserve Bank of India (RBI) transferred Rs1.76 lakh cr to the government on the recommendation of the Bimal Jalan committee. This includes a dividend of Rs1.2 lakh cr. This also includes a one-time transfer of a little over Rs52,000cr of excess provisions identified under the revised Economic Capital Framework.

Ever since this announcement was made, the decision was subject to many an analyses and debates within the financial community. Many were of the view that the transfer by the RBI to the Centre would set a precedent and as such can be viewed as a threat to its autonomy. Others saw this as a valuable use of RBI’s excess reserves, and labelled the transfer as an exception, not a rule. In these times, it is imperative to understand the math behind the numbers to interpret the move.
 
A glance at the RBI’s capital reserves:
In times of economic and/or financial turbulence, RBI utilizes the reserves to preserve the economic health of the country. The main purpose of the capital reserve is to enable the RBI to meet any financial emergency situation out of liquidity crisis, etc., on its own. Capital actually indicates that the ready funds are available with the RBI to manage its own business. The RBI can consider this as a financial capacity while delivering some action like liquidity injection. Liquidity emergencies like the Global Financial Crisis, IL&FS liquidity situation, etc. points towards the strengthening of such a reserve to manage contingencies. Funds to the capital reserves are added out of the net income or profit of the RBI. Every year, such allocation from the net income is made to the capital reserve.

The RBI’s reserves broadly consist of currency and gold revaluation account (CGRA), the investment revaluation account (IRA), the asset development fund (ADF) and the contingency fund (CF). A substantial portion of the reserves consist of CGRA. Let’s breakdown these categories down to understand the basics.
  • CGRA: A huge chunk of RBI’s reserves consists of CGRA. This portion basically includes the unrealized gains or losses on the revaluation of forex and gold. This part of the reserves has grown meaningfully since 2010.
  • IRA: The IRA is sub-divided into IRA-foreign securities (IRA-FS) and IRA-rupee securities (IRA-RS). The former reflects the unrealized gain or loss on the mark-to-market of foreign securities, while the latter is on account of marking rupee securities.
  • ADF: The ADF has been set aside for investment in subsidiaries and associates and internal capital expenditure.
  • CF: The CF is a specific provision made for meeting unexpected contingencies from exchange rate operations and monetary policy decisions. The RBI contributes a notable portion of its profit to the CF. 
As per the August 26, 2019, press release by the central bank, as of June 30, 2019, the RBI’s capital reserve lies within the range of 24.5% to 20.0% of balance sheet. Data for the same period last year shows RBI capital reserve at 26.25% of the total assets.
 
Breakdown of the surplus transfer:
The amount of surplus that the RBI must transfer to the Centre is determined based on two things: realized equity and economic capital.
  • The ‘realized equity’ is the risk provisioning made primarily from retained earnings. This is essentially the existing amount in the RBI’s CF.
  • Economic capital is the realized equity and revaluation balances, which essentially works upto the CGRA.
According to the Jalan committee report, the economic capital as on 30th June, 2019 stood at 23.3% of the balance sheet.
 
What did the Jalan committee recommend?
Particulars % of RBI balance-sheet
Current Recommendation Expected
Economic capital 26.5 20-24.5 23.3
Realized equity 6.8 5.5-6.5 5.5
  • The Jalan panel has recommended that the CF (realized equity) be maintained within a range of 6.5% to 5.5% of the RBI’s balance sheet.
  • The panel suggests maintaining economic capital at a range of 24.5% to 20% of balance sheet.

As of June 30, 2019, the current CF outstanding stood at 6.8% of the RBI’s balance sheet. Hence, the RBI decided to maintain the fund at the lower end of the range (5.5%), the excess funds were written back and transferred to the govt. This write back adds up to Rs52,637cr. The economic capital stood at 23.3% as of June 2019 within the desired range; hence, the entire net income of the RBI of Rs1,23,414cr for the fiscal (without transferring to the CF) has been transferred to the Centre as surplus. This adds up to the total Rs1,76,051cr that has been paid out to the Centre.
 
The government’s play:
The strong RBI transfer that is nearly double the budgeted amount is a bonanza for the government. It may help the government in two ways:
  1. Amid the slowdown, the tax realization may be lower than the expected estimate. At the same, time government has to raise expenditure to support the economy or simply put, it has to give some sort of a stimulus. Here, the RBI transfer will be of major assistance.
  2. Secondly, it may help the government to achieve the budgeted fiscal deficit of 3.3%.
The manner in which the funds are used will be of utmost importance. The share of capital expenditure as a % of GDP has been declining. If the government spends on boosting consumption rather than creating assets, the surplus may not be as effective in revitalizing the economy. 

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