Mumbai: The expert committee to examine the economic capital framework (ECF) of the Reserve Bank of India (RBI) will be formed within a week, two people aware of the discussions said, adding that it will submit its report by the end of February. RBI had on Monday announced, after a meeting of its central board, that the membership and terms of reference of the committee will be jointly determined by the government and the central bank.

The first person cited above said the committee will examine the optimum level of reserves required to be maintained by the central bank. It will be on the lines of earlier committees like the Subrahmanyam Group (1997), the Usha Thorat Group (2004) and the Malegam Committee (2013). All three committees have suggested different levels of reserves to be maintained by the central bank.

The Subrahmanyam Group had recommended that contingency reserve should be built up to 12% of the total assets and set a timeline for achieving the same till 2005. The Usha Thorat Group assessed the reserve adequacy at 18% and the Malegam Committee had pointed out that adequate amount of the profits should continue to be transferred each year to the contingency reserve.

“While the board has not given a formal deadline for submission of the committee’s report, it was unanimously decided that the report should not take more than three months. The board said that this report was of paramount importance and should be submitted as soon as possible," one of the two people said.

The person added that RBI deputy governors and representatives of the finance ministry made presentations on stress in the micro, small and medium enterprises (MSMEs) and on the central bank’s capital position at the board meeting. According to the person cited above, discussions in the board meeting were cordial and issues like capital requirements of commercial banks were unequivocally agreed upon by RBI and the government.

The second person cited above said the RBI governor and the finance minister will decide the composition of the committee, which could also include external experts.

The central bank’s core reserve —contingency fund—is only around 7% of its total assets and the rest of it is largely in revaluation reserves which fluctuate with corresponding changes in currency and gold valuations. In 2017-18, the central bank’s contingency funds and revaluation reserves stood at 2.32 trillion and 6.92 trillion, respectively.

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Moreover, RBI data shows that the growth in the contingency fund has not been on par with growth in revaluation reserves. While revaluation reserves have more than trebled from 1.99 trillion in 2008-09 to 6.92 trillion in 2017-18, the contingency fund has grown a meagre 50% in the same period from 1.53 trillion to 2.32 trillion.

Meanwhile, if the report validates the government’s stand on RBI hoarding capital, the excess could perhaps be used to manage its fiscal deficit before the end of the year.

Indira Rajaraman, an economist and a former RBI board member, in an interview to Mint last week, had said that the government’s actions on the reserves front could be attributed to the fiscal strain and pointed out how achieving the fiscal deficit target for 2018-19 is nearly impossible. “I have always been a believer that this year the finance minister should stand up and say that the fiscal deficit target of 3.3% of GDP (gross domestic product) is just not within reach," she had said.

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However, Subhash Chandra Garg, economic affairs secretary, has recently rejected reports of any fiscal deficit crisis. He had tweeted that the government has already foregone 70,000 crore of budgeted-borrowing and reiterated that it will meet the target of fiscal deficit at 3.3% of GDP.

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