The Reserve Bank of India has given its approval to transfer a sum of Rs 1,76,051 crore to the Government of India, comprising of Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework. The decision was taken on the recommendations of the Expert Committee to Review the Extant Economic Capital Framework for RBI. The panel was led by former RBI Governor Bimala Jalan.
The Reserve Bank of India's Reserves:
The Reserve Bank of India reserves constitutes the contingency fund (CF), currency and gold revaluation account (CGRA), the investment revaluation account, and the asset development fund (ADF).
- The Contingency Fund is a specific provision for meeting the unforeseen contingencies arising from exchange rate operations and monetary policy decisions. A significant portion of RBI's profits is contributed to the contingency fund.
- The Currency and Gold Revaluation Account reflects the unrealized gains or losses on the revaluation of forex and gold. CGRA provides a buffer against exchange rate/gold price fluctuations.
- The Investment Revaluation Account consists of IRA-Foreign Securities (IRA-FS) and IRA-Rupee Securities (IRA-RS). IRA-Foreign Securities (IRA-FS) indicates the unrealised gain or loss on the mark-to-market of foreign securities like foreign currencies and foreign currency assets. IRA-Rupee Securities is on account of marking rupee securities like government securities (Central government) etc.
- The Asset Development Fund has been created to meet internal capital expenditure and make investments in subsidiaries and associated institutions.
Understanding the RBI Surplus Reserves:
The RBI's surplus reserves are based on 2 pillars i.e. Realized Equity and Economic Capital. Realized equity of RBI is primarily the retained earnings which indicate the amount present in the RBI's contingency fund. Economic capital is defined as a combination of realized equity and revaluation reserves.
The Bimal Jalan Panel and its recommendations:
In November 2018, the RBI decided to form a committee to review the Economic Capital Framework for the Reserve Bank. Hence, the six-member panel was constituted on December 26, 2018. Former RBI Governor Bimal Jalan was given the responsibility to head the panel and to submit its report. As a result, the panel has recommended a surplus distribution policy under which the central bank has to transfer its surplus reserves to the Indian government. These recommendations target the level of realized equity which has to be retained by RBI within the overall level of its economic capital. The Jalan panel has set a range for this component which is reflected in the central bank's balance sheet. The range has been set at 5.5%-6.5% of the contingency fund.
As per the latest data, the current CF outstanding is marked at 6.8% of the RBI’s balance sheet. So, as per the panel's recommendations, this excess part as compared to the decided range must be distributed to the Indian government. This component amounts to Rs 52,637 crore. Also, the panel has suggested maintaining economic capital at a range of 24.5% to 20% of the balance sheet. This component is presently marked at 23.3% as of June 2019. The excess amount under this component is Rs 1,23,414 crore. So, this amount should be transferred to the central government as a surplus.
Therefore, a total of Rs 1,76,051 crore will be paid out to the government by the Reserve Bank of India. This money from the RBI’s surplus reserves has been anticipated to boost the overall revenue for the government and will help meet its fiscal deficit target. The Central government is expected to put the RBI’s surplus funds to productive use which can have a sustainable multiplier impact on overall growth in India's economy.
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