The panel’s recommendation for transfer of excess reserves includes both contingency and revaluation funds
Jalan panel member Subhash Chandra Garg favoured a one-time transfer of surplus RBI reserves
New Delhi: The Bimal Jalan panel that was set up to review the economic capital framework of the Reserve Bank of India (RBI) has decided to recommend transfer of surplus reserves to the government in a staggered manner over three-five years based on a predetermined formula.
“We have finalized the report. It will be submitted in 10-15 days to the RBI after editing," an official of the panel said on condition of anonymity. The panel had its last meeting on Wednesday.
The transfer of surplus capital may help the government meet its fiscal deficit target at a time when finance minister Nirmala Sitharaman has narrowed the budget deficit target for the current fiscal to 3.3% of gross domestic product in July from 3.4% set in February’s interim budget. Sitharaman has budgeted to receive ₹1.06 trillion this fiscal from RBI through dividends.
The Jalan panel’s recommendation for transfer of excess reserves includes both contingency and revaluation funds, the official said. “We have recommended for periodic review of the economic capital framework of RBI," he added. The official declined to disclose details regarding the amount of money likely to be transferred to the government this year.
While currency and gold revaluation reserves of RBI have more than tripled to ₹6.92 trillion in 2017-18 from ₹1.99 trillion in 2008-09, the contingency fund has grown 50% during the same period to ₹2.32 trillion.
Revaluation reserves have to be adjusted depending on the changes in the value of the dollar and gold portfolios, and most of the expansion in RBI’s balance sheet has come from the sharp rise in the value of foreign securities held by it.
The government believes that RBI is being too conservative and is sitting on huge reserves and hence part of it should be transferred to the government for more productive use.
The optimum outcome should be to amend the RBI Act to give certainty to reserve transfers every year, according to Radhika Pandey, an economist at the National Institute of Public Finance and Policy. “In most of the countries some sort of guidance is there in the law itself. It puts to rest these debates every few years as to how much RBI needs to transfer to the government every year," she added.
The official also admitted that there were differences within the panel, pointing to the dissent note submitted to the panel by finance secretary Subhash Chandra Garg. He is said to have favoured a one-time transfer of surplus reserves instead of a staggered one. “The dissent note will be included in the report unless it is withdrawn before the report is submitted," the official said.
In an interview on 8 July, Garg said the Jalan committee report would be discussed by RBI’s board. “They will take an appropriate call. I don’t think that it is probably required to be discussed by the government," he added.
RBI had set up the Jalan panel in December. Former deputy governor Rakesh Mohan is the vice chairman of the panel. Other members include RBI central board directors Bharat Doshi and Sudhir Mankad, deputy governor N.S. Vishwanathan and finance secretary Garg. The panel later got extensions as it could not resolve the differences among its members.
“[It would] propose a suitable profits distribution policy, taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding less provisions than required," the central bank said in a statement.
The committee was mandated to also suggest an adequate level of risk provisioning that RBI needs to maintain. That apart, any other related matter, including treatment of surplus reserves created out of realized gains, was within the ambit of this committee.
In an interview on 5 November on the government’s proposal to dip into RBI’s contingency reserves, Jalan said the issue hinges on the potential impact of the contingency fund on the rest of the banking sector or the financial sector, and how urgent it is.
“RBI’s responsibility is also to make sure the financial system, public sector banks, credit delivery by all the banking system is as desirable as it can be. They have contingency fund in the sense that if there is requirement, then they can meet those requirements to finance the interest of the creditor. The contingency reserve is supposed to enable RBI that without creating money they can finance what is required. For example, exchange rate management," he added.
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