The Bimal Jalan panel may recommend transferring up to Rs 3 lakh crore of surplus RBI reserves to the government, BofAML economists say. (Photographer:Scott Eells/Bloomberg News)

Surplus RBI Reserves Must Be Used For Bank Recapitalisation, Says BofAML

The Bimal Jalan panel may recommend transferring up to Rs 3 lakh crore of surplus RBI reserves to the government and the money should be used for bank recapitalisation, Bank of America-Merrill Lynch said on Tuesday.

The report of the Jalan-led six-member committee on the Reserve Bank of India’s economic capital framework is likely to be submitted this month, according to media reports.

Depending on the methodology, the panel will identify Rs 1-3 lakh crore, or 0.5-1.5 percent of India’s gross domestic product, as surplus RBI reserves, BofAML economists said in a note Tuesday.

They were of the opinion that RBI doesn’t need to keep aside additional capital to tackle the large quantum of non-performing assets in India’s banking system.

“We actually welcome the use of excess RBI capital to recapitalise public sector banks to support economic recovery,” they said, adding even the RBI Act allows for transfer of the capital—provided RBI reserves are maintained at $0.7 million.

RBI can “monetise networth as the creator of money” and will not have to resort to selling of government securities or forex reserves either, it said.

If the excess RBI capital is used for bank recapitalisation, it will be neutral from both a fiscal deficit and liquidity management perspective, it said.

BofAML also said bank recapitalisation can indirectly support RBI objectives on liquidity management, where the central bank has been buying back bonds to inject liquidity. Drawing down from the excess capital will not impact ratings as well, as the ratings depend on RBI’s forex reserves and not on internal reserves or the networth, it said.

The Jalan panel was constituted last December, after a protracted debate on RBI reserves. While the money will help the fiscally-constrained government, sections of people within RBI, including former governor Urjit Patel, were unhappy with the move.

Constitution of the panel was one of the first major decisions initiated by Shaktikanta Das, after he was appointed the RBI governor last December.