Some analysts were expecting the committee would recommend a transfer of at least Rs 3 trillion from RBI’s reserves — Rs 1 trillion from contingency reserves and Rs 2 trillion from revaluation reserves.
“This is a bonanza for the government and the markets. On a standalone basis, it is a windfall. To that extent, the market borrowing gets reduced,” said Ananth Narayan, associate professor, finance, at the SP Jain Institute of Management and Research.
“The transfer of surplus from the RBI should help offset the expected shortfalls in various tax revenues in FY20 and aid the government in meeting its fiscal deficit target,” said Aditi Nayar, principal economist at ICRA.
While the RBI did not put out the committee report in public, it issued a detailed statement, which said the central bank’s board accepted the recommendations.
The committee said since the RBI forms “the primary bulwark for monetary, financial and external stability”, the resilience of the central bank needs to be commensurate with its public policy objectives and “must be maintained above the level of peer central banks as would be expected of a central bank of one of the fastest growing large economies of the world”.
According to the committee, the RBI’s provisioning for monetary, financial and external stability risks is the country’s savings for a “rainy day” (a monetary/financial stability crisis), which has been consciously maintained with the RBI in view of its role as the monetary authority and the lender of last resort.
The RBI’s equity is also required to cover credit risk and operational risk.
Dhananjay Sinha, head of strategy and chief economist, IDFC securities, explained what the Jalan panel has really done.
Concept of two equities
To understand Jalan committee report’s recommendations, two concepts of equity, or capitals used in central banks, need to be understood.
First, the committee talks about the “economic capital”. This is the risk capital that a central bank must carry to cover all its risks related to its assets and ongoing activities, such as market risk, operational risk, etc.
The economic capital is roughly expressed as contingency fund plus revaluation reserve and some other minor components, such as an asset-development fund. The total economic capital works out to about Rs 9.6 trillion as of July 2018. In 2017-18, the contingency fund stood at Rs 2.32 trillion. Most of the revaluation reserve in RBI’s balance sheet is currency and gold revaluation account (CGRA), which stood at Rs 6.92 trillion at the end of June 2018.
Others, such as “Investment Revaluation Account-Rupee Securities”, were relatively small.
According to the Jalan committee report, the economic capital as on June 30 stood at 23.3 per cent of the balance sheet.
This means the balance sheet size of the RBI as in June probably increased to about Rs 40.5 trillion (from Rs 36.18 trillion a year ago). This also matches with the balance sheet size indicated in the report through other calculations.
Now, the second capital mentioned by the committee report is “realised equity” It is simply the “contingency fund”. In July 2018, was Rs 2.3 trillion.
The Bimal Jalan
committee simply says that the RBI, at all times should keep this “realized equity” at 5.5 per cent to 6.5 per cent of the balance sheet. The panel said the realised equity stood at 6.8 per cent of the balance sheet, but it can technically go down as much as 5.5 per cent.
The RBI board agreed on 5.5 per cent, and decided to transfer the balance 1.3 per cent of the fund to the government. This works out to be Rs 52,637 crore.
“The committee has actually taken a very conservative approach in maintaining the equity,” said Sinha.
According to a report by former chief economic advisor, Arvind Subramanian, realised equity is maintained at only about 2 per cent globally. The RBI statement said, “As on June 30, 2019, the RBI… [has] one of the highest levels of financial resilience globally.”
What about RBI’s huge dividend?
This has left economists flabbergasted. The RBI has indeed reasons to earn more. In the fiscal year under consideration, the RBI bought bonds worth about Rs 3 trillion from the secondary market.
“It has earned a fat interest on that,” said Ananth Narayan. But a clearer picture can emerge only when the annual report is released, possibly on August 29.
It is not as if the government will enjoy the entire sum. Since the bonds were of the government and it was paying interest, that particular amount gets cancelled.
What stays with the government though, is the other components of the dividend, plus the transferred reserves, as recommended by the Jalan panel. The revised framework technically would allow the RBI’s economic capital levels as on June 30, 2019, to lie within the range of 24.5 per cent to 20 per cent of the balance sheet.
The economic capital as on June 30, 2019, stood at 23.3 per cent of the balance sheet. Governor Shaktikanta Das chaired the 578th meeting of the central board. Deputy governors N S Vishwanathan and Mahesh Kumar Jain, and other directors — Prasanna Kumar Mohanty, Dilip S Shanghvi, Natarajan Chandrasekaran, Bharat Doshi, Sudhir Mankad, Manish Sabharwal, Swaminathan Gurumurthy, Revathy Iyer and Sachin Chaturvedi — attended the meeting. The government-appointed directors Rajiv Kumar, finance secretary and secretary, Department of Financial Services, and Atanu Chakraborty, secretary, Department of Economic Affairs, were also present.