BQ Exclusive: RBI Panel May Not Suggest Large Surplus Transfer To Government
A panel set up to review the economic capital framework of the Reserve Bank of India may not recommend a large transfer from the central bank’s existing reserves to the government, said a person directly familiar with the matter.
While the panel may recommend tweaking some of the rules that determine the amount of reserves held by the central bank, these changes may not result in a significant one-time transfer, this person said on the condition of anonymity. The changes, however, could lead to an increased payout of dividend in subsequent years, the person added.
The panel, headed by former governor Bimal Jalan, is likely to finalise its recommendations at its next meet on June 12, said a second person familiar with the matter. The panel, set up in December, is reviewing both the existing reserves held by the central bank and future transfers.
Jalan could not be reached for a comment. Emails were sent to the Ministry of Finance and the Reserve Bank of India on Tuesday evening. The story will be updated when BloombergQuint receives a response.
Most of the panel members, except Finance Secretary Subhash Chandra Garg, are not in favour of any significant relaxation of the formula that is used to calculate the RBI’s capital needs, said the first person quoted above.
The RBI uses the ‘stressed value at risk’ metric, popularised after the global financial crisis. Further, it uses a formula (stressed value at risk at 99.9 percent confidence level) which requires it to maintain an equity-to-assets ratio of 27 percent. Some government officials had argued that making the formula less stringent could release Rs 3.6 lakh crore in funds from the RBI’s reserves.
Most committee members are of the view that the market risk parameters — which judge risk emerging from forex and debt market volatility — can be eased marginally. However, if that is done other parameters, such as those judging potential credit risk involved in fulfilling ‘lender of last resort’ function, would need to be tightened. A weaker central bank balance sheet would also reduce its ability to conduct liquidity operations in the market, this person said.
The panel could decide on transferring a certain amount, which could be ‘very less’ as compared to the government’s expectation of Rs 3.6 lakh crore, the official said.
However, if the panel relaxes the formula used to calculate ‘stressed value at risk’, as sought by the government, it could help in increasing the dividend transfer in subsequent years, this person added.
The debate over the RBI’s reserves was one of the reasons for a tussle between the government and the central bank, which eventually led to the exit of former governor Urjit Patel.
In a speech on Oct. 26, 2018, RBI deputy governor Viral Acharya had said that having adequate reserves is an important part of central bank independence.
“Having adequate reserves to bear any losses that arise from central bank operations and having appropriate rules to allocate profits (including rules that govern the accumulation of capital and reserves) is considered an important part of central bank’s independence from the government,” Acharya said.
The government, however, continued to argue that the reserves are excessive.
According to a Bank of America-Merrill Lynch report dated April 22, the RBI could release Rs 1 lakh crore if it chooses to reduce the contingency reserves that it holds. The RBI’s contingency reserves are at 6.5 percent of assets, which is higher than what most central banks hold, the brokerage house had pointed out.