Union Finance Minister Arun Jaitley holding a meeting with the officials of Department of Financial Services and RBI in New Delhi on Friday (Photographer: Manvender Vashist/PTI)

RBI Can Transfer Rs 1 Lakh Crore Of Excess Reserves To Government: BofAML

The Reserve Bank of India has "more than adequate" reserves and that it can transfer over Rs 1 lakh crore to the government after a specially constituted panel identifies the "excess capital", according to a report.

Last Monday, the RBI board meeting led to the proposal of formation of a committee, which is likely to be announced later this week.

"We expect the proposed committee on the RBI's economic capital framework to identify Rs 1-3 lakh crore which is 0.5-1.6 percent of the gross domestic product as excess capital," analysts at Bank of America Merrill Lynch said in a note on Monday.

The brokerage report said that as per its stress tests, the central bank can transfer Rs 1 lakh crore to the government if the transfer is limited to passing excess contingency reserve and can go up to Rs 3 lakh crore, if total capital is included.

Giving a break-up, the report said Rs 1.05 trillion can be transferred if the contingency reserve is capped at 3.5 percent of the RBI book. It further said this level will be 75 percent higher than the average of BRICS economies, excluding India.

Additional forms of transfers can include Rs 1.16 lakh crore from the contingency reserves if one restricts to yield rise of 4.5 percent as against 9 percent at present.

Limiting the appreciation cover in the RBI's currency and gold revaluation account to 25 percent (Rs 53.25 per dollar) will release about Rs 72,000 crore to the government, it said.

It also said capping the overall reserves at 20 percent of the RBI's book as against 28.3 percent now and higher than 18 percent recommended by the Usha Thorat panel will be able to release Rs 3.11 trillion.

The statutes do not prohibit transfer of excess capital to the government, it said, pointing out that the RBI Act places no bar as long as government maintains Rs 5 crore of reserve funds under Section 46 of the RBI Act.

While Section 47 enjoins the RBI to credit its annual surplus to the national exchequer, after provisions, it does not place any restrictions on further transfers, it said.

The RBI's contingency reserves at 7 percent are higher than the BRICS (excluding India) average of 2 percent, it said, adding the revaluation reserves are also on the higher side relative to BRICS central banks.

The government and the RBI will be jointly deciding on the panel constitution and also its terms of reference, as per a press statement after the nine-hour marathon board meeting.

Following widespread criticism from many quarters,finance minister Arun Jaitley had said over the weekend that the government did not need any support from the RBI's reserves for the next six months. However, multiple reports had claimed that the government is eyeing the extra cash which will help it in the run-up to the elections.

This comes amid falling Goods and Service Tax collections and little borrowing window left for the government, as it has already used up close to 96 percent of borrowings as of October-end. By taking money from the RBI, the government will only increase its fiscal deficit, as it will have to issue bonds to the central bank.

The government for the second year in a row has pegged fiscal deficit at 3.3 percent of GDP this fiscal year. Many analysts are expecting the government to overshoot this by at least 20-30 bps by March.