RBI Sets Up Bimal Jalan-Led Panel On Economic Capital Framework

The Reserve Bank of India, in consultation with the government, constituted a committee led by the central bank’s former Governor Bimal Jalan to look into its Economic Capital Framework.

The committee also comprises former RBI Deputy Governor Rakesh Mohan, central board members Bharat Doshi and Sudhir Mankad, Economic Affairs Secretary Subhash Chandra Garg and RBI Deputy Governor NS Vishwanathan, according to a statement on the RBI’s website. It is expected to submit its report within 90 days of its first meeting.

The panel would review the status, need and justification of various provisions, reserves and buffers held by the RBI. It would suggest an adequate level of provisioning that the RBI needs to maintain. It would also determine whether the RBI is holding provisions, reserves and buffers in surplus or deficit of said levels, and would propose a suitable profit distribution policy taking into account all the likely situations.

The decision to create the committee was taken at the RBI’s central board meeting on Nov 19. That meeting came after differences between the RBI and the government spilled out in the open. Urjit Patel’s resignation as RBI governor nine months ahead of his term ended followed.

The most contentious of the issues that have cropped up between the government and the central bank recently is that of the RBI’s balance sheet. Some sections in the government have argued that the RBI is holding excess reserves, which should be transferred to the government. There are two material components to RBI’s reserves:

• A Contingency Fund of Rs 2.5 lakh crore.
• A Currency and Gold Revaluation Reserve of Rs 6.91 lakh crore.

Most economists agree that a transfer from the unrealised gains in the currency and gold revaluation reserve is not possible without a sale of gold or foreign currency assets. Hence, the debate is centered around whether the central bank is holding excess contingency reserves and whether it should transfer any more funds to it in the future.

The current economic capital framework followed by the RBI is not in public domain. A committee in 1997 had recommended that contingency reserves be maintained at about 12 percent of total assets. At present, these reserves are at about 7 percent.

The government has argued it differently and is looking at the total capital on the RBI’s balance sheet, which it believes is excessive. According to one government calculation, the RBI may be sitting on Rs 3.6 lakh crore in excess capital.

Mohan, the vice chairman of the new committee, told BloombergQuint in an earlier interview that the RBI Act makes it clear that all the profits of the Reserve Bank must be transferred to the government. “The issue is what are the profits based on the accounting method used.”

Given the risks, it’s also important for the RBI to make provisions for various contingencies, he said. Calling such provisioning prudent accounting and that it adds to the confidence that the market has in the central bank, he said it will be best if there is a “clean formula” on this.