The Committee on recommending the appropriate economic capital framework for the Reserve Bank of India (RBI) is divided over the issue of transferring past reserves including unrealized gains in gold and currency revaluation accounts. Most committee members are in favour of reducing the RBI’s excess reserves in a phased manner, without any substantial transfer to the government. The majority view in the committee is that the past reserves of the RBI, especially unrealized gains, in gold and currency revaluation accounts, should not be touched while future transfers should be guided by the new policy.
Government nominee on the Committee, Finance Secretary Subhash Chandra Garg, has expressed differences on key recommendations of the panel.
The Committee is headed by former RBI Governor Bimal Jalan, while former RBI Deputy Governor Rakesh Mohan, who is against transferring a higher surplus to the government, is its Vice Chairman.
Why was the Committee set up?
The Committee was set up following discussions between the Finance Ministry and the RBI last year over the manner in which the central banks’ surplus can be shared with the government.
Its mandate was to “review status, need and justification of various provisions, reserves and buffers presently provided for by the RBI; and (to) review global best practices followed by the central banks in making assessment and provisions for risks which central bank balance sheets are subject to.”
The Finance Ministry had internally estimated RBI’s excess reserves at Rs 3.6 lakh crore. For the year ending June 2018, RBI had total reserves of Rs 9.59 lakh crore, comprising mainly currency and gold revaluation account (Rs 6.91 lakh crore) and contingency fund (Rs 2.32 lakh crore).
Why is this important?
The recommendations of the committee will pave the way for the RBI to transfer past and future excess reserves to the government.
As per Section 47 of the RBI Act, profits of the RBI are to be transferred to the government, after making various contingency provisions, public policy mandate of the RBI, including financial stability considerations.
If the committee recommends a significant chunk of past excess reserves that can be transferred to the government, it will put the Centre into a much better fiscal situation, enabling it to deploy the money for capitalizing the public sector banks and to support economic growth.