The RBI’s reserveshttps://indianexpress.com/article/opinion/editorials/the-rbis-reserves-finance-ministry-5436412/

The RBI’s reserves

There is a case for imaginative thinking on using central bank’s reserves. But it can’t be at the expense of its independence

RBI, RBI reserve, Reserve bank of india, government, government budget, indian express editorial
The RBI makes profits from seigniorage, which comes from its monopoly over issue of currency, whose face value exceeds the cost of printing.

The finance ministry wants the Reserve Bank of India (RBI) to transfer Rs 3.6 lakh crore of its total “reserves” of nearly Rs 9.6 lakh crore, which will go mainly to finance the recapitalisation of public sector banks (PSBs). The idea, by itself, is not new. The RBI makes profits from seigniorage, which comes from its monopoly over issue of currency, whose face value exceeds the cost of printing. The central bank also profits when the rupee depreciates, interest rates fall or gold prices shoot up, as these result in an increase in the valuation of its existing foreign currency, government bond and bullion holdings. These profits ultimately belong to the country. The RBI simultaneously maintains a contingency fund and revaluation account buffers against rupee, interest rate and gold price movements in the opposite direction, reducing the valuation of its assets. The Economic Survey of 2016-17 had argued that there was no need for the RBI to hold so much of “reserves” (in reality, unrealised valuation gains) in its balance sheet.

While the finance ministry is broadly right on principle, the problems, however, arise on two points. The first is on the actual extent of “excess reserves”; this is something that the ministry cannot unilaterally determine, let alone impose on the central bank. The second is what is this so-called return of capital by the RBI going to be for. If it only entails transfer of a portion of bonds and other assets from the RBI’s balance sheet to that of PSBs — in other words, for their recapitalisation — there shouldn’t be an issue really. It is a fact that today we have PSBs saddled with bad loans, the provisioning for which has led to an erosion of their capital base. As many as 11 out of 21 PSBs are under the RBI’s “prompt corrective action” framework, which puts severe restrictions on their lending operations. There can be no two opinions on the need for capital infusion to enable them to lend again — though, of course, not imprudently as before. The RBI’s excess reserves can be a source for such recapitalisation.

But any move in the above direction requires clear rules to be followed. The government has to take the lead in showing that it respects the RBI’s autonomy and independence. To this effect, the government has to work on lowering the distressing trust deficit that has built up between it and the central bank — both need to dial down. Second, “raiding” the RBI’s balance sheet should be for the specific purpose of PSB recapitalisation. Both the central bank and the financial markets have to be convinced that there is no deviation from the path of fiscal prudence. Third, recapitalisation should be linked to reform and no relaxation in the rules relating to treatment of loans defaulters or resolution of stressed assets.

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