Insights into Editorial: Interim bailout: RBI surplus to govt

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Insights into Editorial: Interim bailout: RBI surplus to govt


 

Context:

Recently Reserve Bank of India announced that it would transfer Rs.28,000 crore to the Centre as interim surplus for the half-year ended December 2018.

This is second consecutive year that the central bank has transferred interim surplus to the government.

This will take the Centre’s total receipts from the RBI as surplus transfer in 2018-19 to Rs.68,000 crore.

The central bank had earlier paid ₹40,000 crore to the government as its final share of surplus for 2017-18.

The interim surplus transferred by the RBI now is crucial to the Centre’s ability to meet the revised fiscal deficit target of 3.4% for this fiscal.

 

Income Sources of RBI:

The RBI was founded in 1934 and has been operating according to the Reserve Bank of India Act of 1934. Chapter 4, section 47 of the Act, titled “Allocation of Surplus funds” mandates for any profits made by the RBI from its operations to be sent to the Centre.

  • Till 2014, a certain amount used to be allocated for the Contingency Reserve (CR) and the Asset Development Reserve (ADR).

 

  • However, a committee chaired by YH Malegam in 2013-14 found the balances to be in excess of the required buffer. It recommended the RBI to discontinue the transfer of funds to the CR and the ADR.

 

  • The majority of the income comes from the returns it earns on its foreign currency assets, which are either in the form of bonds and treasury bills of other Central Banks like Federal Reserve of USA.

 

  • The Foreign Exchange Reserves are around $ 400 bn and majority of them are in Foreign Currency Assets.

 

  • The RBI also invests in top-rated securities across the World. It also earns money by lending to banks for very short tenures, such as overnight repo.

 

  • It also claims a Management Commission on handling the borrowings of State Governments and the Central Government. It also earns money through Open Market Operations, which it undertakes regularly to manage liquidity.

 

RBI’s income and surplus growth cannot be measured in commercial terms:

The RBI’s income and surplus growth cannot be measured in commercial terms since a large part of it comes from statutory functions it has to perform as a regulator.

The central bank is not like a corporate enterprise, nor can the government compare itself with a company shareholder.

Though there is nothing wrong in a shareholder demanding an interim dividend pay-out, the fact is that the Centre is advancing a receipt from the next fiscal to bail itself out in the current one.

Should the RBI decide not to repeat this practice, the government’s revenues will suffer because as much as Rs.82,911 crore has been budgeted on this count for the next fiscal.

 

RBI change stance as new Governor takes guard:

The RBI under Mr.Urjit Patel had declined requests from the central government for an additional payment after the dividend pay-out dropped to a five-year low in 2017-2018.

The pay-out had dropped from Rs 65,896 crore in FY 2015-16 to Rs 30,659 crore in FY 2016-17, however, this was due to the costs that the RBI had borne during demonetisation.

In December 2018, the clash over the government wanting to also dip into the central bank’s contingency reserves resulted in a compromise: an expert committee headed by former RBI governor Bimal Jalan was set up to “propose a suitable profits distribution policy taking into account all the likely situations of the RBI.

 

Public Standoff on contentious issues:

The demand on the RBI for more dividends and to part with a greater share of its capital has been a contentious issue between the central bank and the government.

It resulted in a public standoff last year and is seen as one of the reasons for the abrupt exit of then Governor Urjit Patel.

The finance ministry has asked the central bank to transfer about Rs. 27,000 crore of surplus capital withheld by it in the previous two financial years.

Separately, finance ministry officials estimate the RBI has at least Rs. 3.6 lakh crore more capital than it needs, which they say can be used to help bolster weak banks.

However, a recent study by the Centre for Advanced Financial Research and Learning, a Mumbai-based think tank, showed the central bank has insufficient capital, and much less a surplus to hand over to the government.

 

Conclusion:

The government had been putting pressure on the central bank to transfer more funds from the contingency reserves.

Over time, many technical committees have examined the question of how much reserves the RBI ideally needs.

A panel, headed by former RBI Governor Bimal Jalan, had been formed to review the economic capital framework of the bank.

There is a much need to protect the RBI’s autonomy in the setting of interest rates or in the regulation of banks or in other operational spheres.

There should be institutionalization of the system for the sharing of RBI’s surpluses. They should not depend on the individuals, institutions should function with institutional framework.

The government, when it exercises its right as sovereign, whether to set an inflation target or to demonetise high-value currency, is acting well within the norms of the law and the spirit of democracy.