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RBI To Transfer A Record Surplus Of Rs 1.76 Lakh Crore To The Government

RBI central board accepts all recommendations by Bimal Jalan committee on economic capital framework.



Pedestrians walk past the Reserve Bank of India (RBI) headquarters building. (Photographer: Dhiraj Singh/Bloomberg)
Pedestrians walk past the Reserve Bank of India (RBI) headquarters building. (Photographer: Dhiraj Singh/Bloomberg)

The Reserve Bank of India will transfer a record high surplus of a little over Rs 1.76 lakh crore to the government, the central bank said after a board meeting on Monday.

“The surplus transfer includes Rs 1,23,414 crore in surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting of the Central Board today,” a statement from the central bank said.

The surplus transfer was finalised in keeping with the recommendations of a committee, headed by former RBI governor Bimal Jalan. The RBI central board accepted all the recommendations of the committee, the central board said in its statement.

The Committee’s recommendations were guided by the fact that the RBI forms the primary bulwark for monetary, financial and external stability. Hence, the resilience of the RBI needs to be commensurate with its public policy objectives and must be maintained above the level of peer central banks as would be expected of a central bank of one of the fastest growing large economies of the world.   
RBI Central Board Statement
Opinion
RBI Transfer Of Contingency Reserves: Mechanics Of The Transaction

Committee Recommendation 1

The committee recommended that a clear distinction be maintained between the ‘realised equity’ component of the RBI’s reserves and the ‘revaluation component’. The former is reflected through the RBI’s contingency reserves, while the latter is reflected in the revaluation reserves.

The current level of realised equity is at 6.8 percent of RBI’s balance sheet. However, the committee said that the level of the ‘realised equity’ should be maintained at between 5.5 - 6.5 percent of the RBI’s balance sheet.

Accordingly, the central board decided to bring the level of realised reserve down to the lower recommended end - that is, 5.5 percent of the balance sheet. As such, there was Rs 52,637 crore in excess risk provisions on the RBI’s books. This was written back and included in the transfer to the government.

Committee Recommendation 2

According to the central board’s statement, the committee’s recommendations allowed for the capital levels to lie within the range of 24.5 - 20 percent of balance sheet. This capital framework was worked out using the Expected Shortfall (ES) methodology under stressed conditions in place of the extant Stressed-Value at Risk.

The economic capital as on June 30, 2019 stood at 23.3 percent of balance sheet, the central board statement said.

“As financial resilience was within the desired range, the entire net income of Rs 1,23,414 crore for the year 2018-19, of which an amount of Rs 28,000 crore has already been paid as interim dividend, will be transferred to the Government of India.”

Both taken together, the RBI will transfer an additional amount of Rs 1,48,051 crore to the government in the current financial year.

“This is a bonanza for the government,” Ananth Narayan, professor at SP Jain Institute of Management and Research, said to BloombergQuint.

“Of this Rs 1.76 lakh crore, the bulk of it is the regular revenue coming in for the RBI for this year. I am not very sure how Rs 1.23 lakh of revenue has been accrued to the RBI for this year. It is quite large and you have to see how that has come about. But yes, overall the market should be very happy.”

The central bank’s accounts for 2018-19 are due to be released later this week. More clarity on the Rs 1.23 lakh crore number will be available then. It could be on account of the larger scale of OMOs (open market operations) conducted during the year and an expansion in RBI’s balance sheet.

For 2017-18, the RBI had transferred a total of Rs 50,000 crore to the government as dividend. Of this, Rs 10,000 crore had been transferred in the form of an interim dividend.

“It’s a good compromise,” said former RBI Deputy Governor HR Khan to BloombergQuint. He was referring to discussion around much higher amounts expected by the government as part of the implementation of the ECF.

The bond market “will take it positively,” fixed income expert Manish Wadhawan said to BloombergQuint. He described the Rs 52,637 crore transfer as “par-for-the-course”.

Definitely the market will take it positively. There was some kind of rally today because this report was expected. There were a lot of expectations. You might see that rally continuing tomorrow too.   
Manish Wadhawan, Fixed Income Expert

The 10-year government bond rallied today, with the yield slipping 9 basis points.

Watch the discussion with committee member Rakesh Mohan and other experts here:

Opinion
The Transfer Of Surplus Is Not A Raid On RBI’s Balance Sheet, Says Rakesh Mohan

The Backdrop

The debate over whether the RBI is holding too much capital was a key flash point between the central bank and the government, eventually leading to the abrupt resignation of Urjit Patel as central bank governor.

In December, the RBI and the government had agreed to set up a panel to review the central bank’s capital framework, after a stand-off emerged between the two on the issue.

The committee, headed by Bimal Jalan, also included 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.

Its mandate was to 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.

Based on the RBI’s 2017-18 accounts, 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.

Some sections in the government have argued that the RBI is holding excess reserves, which should be transferred to the government. According to one such calculation, the RBI may be sitting on Rs 3.6 lakh crore in excess capital.

Most economists believe that a transfer from the unrealised gains in the currency and gold revaluation reserve is difficult and can only be done over a period of time, if at all. A transfer from contingency reserves and adjustments to future transfers from reserves are easier to execute.

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, which is much below that level. The government has argued it differently and is looking at the total capital on the RBI’s balance sheet, which it believes is excessive.

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Understanding RBI’s Balance Sheet: Is It Sitting On Excess Capital?