Government’s ₹1.76 trillion RBI bonanza raises fresh stimulus hopes

The Reserve Bank of India (RBI) will transfer ₹1.76 trillion to the government this fiscal, the central bank said after a board meeting.

The transfer includes ₹1.23 trillion of surplus for 2018-19 and ₹52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting, RBI said in a statement on Monday. The higher surplus is due to the long-term forex swaps and the open market operations (OMO) conducted by the central bank over the last fiscal.

The surplus transfer was finalized in line with the recommendations of the committee under former central bank governor Bimal Jalan. RBI’s central board accepted all the recommendations of the committee.

The additional amount of ₹86,000 crore that the government will receive this year above its budgeted ₹90,000 crore as transfers from RBI could be either used to provide fiscal stimulus to a sagging economy, reduce off-balance sheet borrowings or meet the expected shortfall in revenue collections.

“It is a surprise to a certain extent because we had expected it to be a staggered payment to the government instead of everything in one shot. The budget expected a ₹90,000 crore surplus transfer and this extra ₹80,000 crore, to my mind, will act as a cushion against the possible shortfall in revenue collection in FY20,” said Madan Sabnavis, chief economist at CARE Ratings. “Overall, I do not think that this will have inflationary pressures on the economy, since firstly, the current inflation levels are quite low and secondly, the government might not use this for spending and could instead use it to meet the possible revenue shortfall.”

The RBI committee has recommended a surplus distribution policy, which targets the level of realized equity to be maintained by RBI within the overall level of its economic capital, the statement said.

The committee defines economic capital as a combination of realized equity and revaluation reserves. RBI’s realized equity, which is a form of contingency fund for meeting all risks/losses primarily built up from retained earnings, currently stands at 6.8% and the Jalan committee recommends it to be in the range of 6.5-5.5% of the balance sheet. Keeping these recommendations in view, the central board has decided to set the realized equity level at 5.5% of the balance sheet, while transferring the remaining excess reserves worth ₹52,637 crore to the government.

“Jalan committee has given a range of 5.5-6.5% for Contingent Risk Buffer. My worry is all governments will work at the lower range of 5.5%, like they have done it for this year. It does not give RBI very much space to manoeuvre. Keeping RBI at the rock-bottom level is not a sensible idea, but I am afraid that is what is going to happen,” said Pronab Sen, former chief statistician of India.

The central board has also decided to set the economic capital level comprising the contingency fund and revaluation reserves as on 30 June at 24.5-20%.

In turn, the board has not touched the revaluation reserves, which comprises periodic marked-to-market unrealized/notional gains/losses in values of foreign currencies and gold, foreign securities and rupee securities, and a contingency fund.

“As financial resilience was within the desired range, the entire net income of ₹1,23,414 crore for the year 2018-19, of which an amount of ₹28,000 crore has already been paid as interim dividend, will be transferred to the Government of India. This is in addition to the ₹52,637 crore of excess risk provisions, which have been written back and consequently will be transferred to the government,” said the statement.

The six-member panel headed by Jalan was appointed in December to review the ECF for RBI.

The government has already received ₹40,000 crore during FY19. In February, RBI had announced a ₹28,000 crore interim dividend, taking the total dividend transfer to the government to ₹68,000 crore. The RBI central board is yet to approve the ₹28,000 crore interim dividend.

The government has set a fiscal deficit target of 3.3% of gross domestic product for the current fiscal, revised downward from 3.4% pegged in the interim budget in February.

Sen said the sensible thing for the government would be to reduce the balance sheet and off-balance sheet borrowings using the additional transfer from RBI, such as the recapitalization bonds issued for public sector banks and huge borrowing by the Food Corporation of India from the small savings fund.

Aditi Nayar, principal economist at Icra India, said the transfer of surplus from RBI should help offset the expected shortfalls in various tax revenues in 2019-20 and aid the government in meeting its fiscal deficit target. “As a result, G-Sec yields are likely to ease in the immediate term,” she added.

Asit Ranjan Mishra in New Delhi contributed to this story.