Bimal Jalan Panel Calls For ‘Harmony’ In Government, RBI Objectives
A committee set up by the Reserve Bank of India, headed by former Governor Bimal Jalan, was guided by the need to ensure alignment of objectives between the government and the central bank, the panel’s report, released on Tuesday, said in its preamble.
The panel was set up against the backdrop of a bitter battle between the RBI and the government. Its recommendations were accepted by the RBI’s central board on Monday and resulted in a modest one-time transfer Rs 52,637 crore from the central bank’s contingency fund, together with an annual surplus of Rs 1.23 lakh crore.
The panel report begins by emphasising the need to ensure the credibility of the RBI.
As a central bank is a part of the sovereign, ensuring the credibility of the RBI is as important, if not more, to the government as it is to the RBI itself. The committee also noted that while there may occasionally arise a difference of views in the conduct of the central bank’s operations, there always needs to be harmony in the objectives of the government and the RBI.Bimal Jalan Committee Report
The committee examined a host of issues ranging from the potential risks the RBI may be exposed to, the level of capital on its books relative to others and whether the capital held by the central bank can be put to better use if transferred to the government.
After examining these issues, the committee laid down the principles of surplus distribution from here on.
Determining ‘Excess’ & Transferring Surplus
The committee said that the ‘reserves’ on the RBI’s balance sheet must be viewed in two separate buckets. According to the committee, revaluation balances account for 73 percent of the RBI’s economic capital.
“The committee recommends that ‘excess’ revaluation balances, if any, should continue to remain on the balance sheet as risk buffers for market risk, till such time that they are realised through the sale or maturity of the underlying asset,” the report said.
Apart from the revaluation balances, the RBI’s balance sheet includes ‘contingent reserve buffers’. The committee recommended that the contingent reserve buffer be maintained at 5.5-6.5 percent of the balance sheet.
Based on the above principles, the committee recommended that the RBI arrive at the ‘available realised equity’ (ARE) and compare it with the requirement laid down by the committee to determine the amount of surplus to be distributed along the following lines:
- Entire net income shall be transferred to the government, if the RBI’s ARE is equal to or greater than upper bound of the ‘requirement’.
- Subject to ARE lying within the range of ‘requirement’, the central board may consider risk provisioning in a manner so as to maintain the RBI’s ARE within the range of ‘requirement’, till the next periodic review.
- If the ARE falls short of the lower bound of ‘requirement’, appropriate risk provisioning should be made by the RBI to augment the realised equity to the lower bound of ‘requirement’ and only the residual net income (if any) should be transferred to the government.
- If any risk provisioning from net income has been made previously for market risk, the excess realised risk provisioning over the target level of market risk buffers caused by an increase in revaluation balances, may be reversed.
- There shall be no distribution of unrealised revaluation balances.
The committee noted that on making reasonable allowance for volatility in the RBI’s net income relative to its balance sheet size, average risk provisioning over the five year period of 2018-19 to 2022-23 for CRB of 5.5 and 6.5 percent could range from 8.1 to 16.6 percent of net income in the normal scenario with a range of 5.4 to 11.1 percent of net income in case of a positive shock and 16.0 to 32.8 percent of net income in case of a negative shock respectively.Bimal Jalan Committee Report
The committee has called for a review of the framework every five years.
April-March Financial Year For RBI
The committee also recommended that the RBI accounting year be changed from July-June to April-March. Such a change would put an end to the recent practice of the government demanding an interim dividend from the RBI.
The recommendation was based on four key considerations:
- The RBI would be able to provide better estimates of the projected surplus transfers to the government for the financial year for budgeting purposes.
- It could reduce the need for interim dividend being paid by the RBI. The payment of interim dividend may then be restricted to extraordinary circumstances.
- It would obviate any timing considerations that may enter into the selection of open market operations/market stabilisation scheme as monetary policy tools.
- It would also bring about greater cohesiveness in the monetary policy projections and reports published by the RBI which mostly use the fiscal year as the base.
Opportunity Cost Of RBI Capital
In determining the level of capital that should be held on the central bank’s balance sheet, the committee waded into the debate on whether the capital lying on the RBI’s balance sheet could be put to better use.
The issue had been flagged by former chief economic advisor Arvind Subramanian, who argued that the RBI’s capital could be used for more urgent requirements such as bank recapitalisation.
The Jalan Committee said that even if the RBI’s economic capital could appear to be relatively higher, it is largely on account of the revaluation balances. “The proportion of realised equity to balance sheet has come down through the surplus distribution—balance-sheet expansion adjustment process since the adoption of Malegam Committee recommendations,” the report said.
The committee went on to say that if an assessment has to be made on whether the RBI’s capital can be put to better use, it should be done on the following principles:
- The difference in the overall return on the assets held by RBI and the average debt servicing cost for the government.
- The opportunity cost of capital which is the return that the government would have generated had RBI’s capital been redeployed.