Challenge to the Reserve Bank of India’s reserves

Challenge to the Reserve Bank of India’s reserves

News:

1. The Centre is dwelling upon the burgeoning reserves of RBI which the central bank necessitates as an emergency buffer not meant to be shared.

Important Facts:

2. The RBI’s reserves are built through transfers from the annual surpluses in the profit and loss account of RBI.
3. The balance surplus after transferred to reserves is given to the Centre as dividend.
4. As of June 30, 2018, the RBI had ₹10.46 lakh crore in reserves, bulk of it under two heads currency and gold revaluation reserve (CGRA) (₹6.91 lakh crore) and contingency reserve (₹2.32 lakh crore).
5. So the currency and gold revaluation reserve (CGRA) accounts for 19.11% of total assets and the contingency reserve for another 6.41% as of 2108.
6. The level of CGRA now covers about a quarter of the total currency reserves of the RBI.
7. Reasons for Centre’s demand on utilising RBIs reserves :

• To bridge its fiscal deficit.
• Centre needs more funds for recapitalisation of banks.
• To invest more in social sector schemes in upcoming election year.

8. RBI’s arguments:

• Subrahmanyam Committee: In 1997 it suggested to keep  a contingency reserves level of 12% of total assets.
• Usha Thorat Committee: In 2004, the committee suggested that currency and gold revaluation reserve (CGRA) should be 12.26% of total assets while the contingency reserve should be 5.5%, totalling 17.76% in all. But RBI didn’t accept the recommendations.
• H. Malegam Committee: On this committee recommendations, In 2013-14, then governor, Raghuram Rajan, decided to transfer the entire surplus in the RBI’s profit and loss account to the Centre without appropriation to reserves.
  • At that time (2013-14),CGRA was 21.81% of total assets and the contingency reserve was 8.44%. The corresponding numbers now (2017-18) are 19.11% and 6.41% respectively.
  • So by imputation, it can therefore be concluded that the buffer is now inadequate going by the Malegam Committee recommendation.

9.       Aim of keeping reserves

• The CGRA is meant to control currency fluctuation or if there is a decline in the rupee value of gold.
• The contingency reserve is meant to cover depreciation in the value of the RBI’s holdings of government bonds (domestic and foreign), if yields rise and their prices fall.
• The reserve is also meant to cover expenses from extraordinary events such as demonetisation,money market operations and currency printing expenses in a year of insufficient income.
• The reserve is also a cover for the deposit insurance fund given that the Deposit Insurance and the Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of the RBI.

10. Way forward:

• Form a committee with representatives from government, the central bank, academicians and the market.
• The committee should go into all aspects of the RBI’s balance sheet, suggest a safe buffer in reserves and set out a fair method of sharing the reserves, if at all they should be.