New Delhi: The recommendations of the committee to revise the economic capital framework of the Reserve Bank of India (RBI) are not cast in stone and the revaluation balance which is accumulated through depreciation of rupee -- currently left untouched -- can be partially used to fund defence or security exigencies if the need arises, former governor Bimal Jalan, who headed the panel, told Mint in an interview.
“If you need it in some later years, something requires to be done, there is a defence or security (exigency) as it happens from time to time, then you can do that, next year or year after. All these things are open to consideration depending on what the circumstances are," Jalan said,
RBI’s capital reserves, a technical issue replete with jargons, has become a hotly debated and often a political issue over the recent years. While the government feels the central bank is sitting on excess capital which can be better utilised for socio-economic benefit of its citizens, critics often point out that it would amount to “raiding the RBI" for short-term benefits which will compromise the credibility of the central bank. The differences between RBI and government led to the resignation of governor Urjit Patel followed by his deputy Viral Acharya.
To determine the level of excess capital of RBI, the government in December 2018 set up a panel headed by Jalan with former deputy governor Rakesh Mohan and representatives of the finance ministry and RBI as members of the committee. The committee last month recommended a new formula for transfer of surplus reserves to the government through which the government received a one-time payout of ₹52,637 crore. This was well below market expectations and calculations by former chief economic adviser in the finance ministry Arvind Subramanian who had claimed RBI had ₹4.5-7.0 trillion of excess reserves which could be utilised for recapitalising public sector banks.
Jalan, in the interview, said the report is not a “constitutional activity" and only advisory in nature. “Anybody can touch anything. It’s up to government and RBI. RBI can revise its opinion. It’s not written in stone. RBI and the government may have accepted the report. But if more is required, all those options are open. If something is required to be done in public interest, this report does not say it should not be done. Both RBI and the finance ministry take action based on current situation. If circumstances change, then the action will change," he added.
The Jalan panel had decided not to touch the revaluation reserves--the major portion of RBI’s capital base -- reflecting nominal gain of its assets which are yet to be realised. Justifying its decision not to touch the revaluation balances, the committee said such reserves are highly volatile, and whose levels move autonomously depending on RBI’s discharge of its public policy objectives of maintaining price, financial and external stability, coupled with international market developments reflected in movements in the price of foreign assets, exchange rate, interest rate and gold price.
The panel said RBI transferring ‘what it has not received’ could be seen as monetisation of fiscal deficit. Trying to realise these revaluation gains would involve selling a substantial portion of the RBI’s dollar assets which could result in unsustainable temporary rupee appreciation; compromised monetary policy stance with severe liquidity and credit squeeze which will have an adverse impact on growth and stability; along with the moral hazard issue of setting the precedence for using rupee depreciation funding fiscal expenditure, the report said.
The committee, however, was of the view that it should not concern itself with the issue of alternative deployment of excess accumulated revaluation balances as it did not fall within the committee’s terms of reference. It recommended that ‘excess’ revaluation balances, if any, should continue to remain on the balance sheet as risk buffers for market risk, till such time that they are realised through the sale or maturity of the underlying asset.
The RBI’s realised equity or the component which is actually determined by the central bank’s management was 7.2% of its balance sheet in 2018 as revaluation balances account for 73% of RBI’s economic capital, rising from 37.9% in 1997. During periods of stress and currency depreciation, the revaluation balances of central banks typically go up which is not truly reflective of financial resilience.
“The Committee recognized that the RBI’s financial stability risk provisions need to be viewed for what they truly are, i.e., the country’s savings for a rainy day (a financial stability crisis), built up over decades, and maintained with the RBI in view of its role as the lender of last resort. Its balance sheet, therefore, has to be demonstrably credible to discharge this function with the requisite financial strength," the panel report said.
Given that the government’s manoeuvrability on recapitalization of commercial banks or the possibility of RBI getting constrained during a financial stability crisis, the committee recognized the need for the RBI to maintain adequate risk buffers to ensure appropriate level of financial resilience in such circumstances.
The committee noted that about half of the 53 central banks surveyed as part of its own cross-country survey had a loss at least once over the last five years because of taking valuation gains. Incidentally, were RBI to follow this accounting approach, it too would have suffered a loss, at least in 2004–05, 2006–07, 2009–10 and 2016–17, as valuation losses would have exceeded the RBI’s surplus in those years, the report said.
For instance, in 2006–07, 75% of RBI’s revaluation balances were wiped out, amounting to 1.5% of the GDP. In 2016–17, RBI’s revaluation balances fell more than ₹1 trillion due to an appreciating rupee and cross-currency movements. “The only reason the markets, government fiscal balance and the economy as a whole are not impacted was that the RBI had sufficient risk provisioning to absorb these risks," the committee concluded.
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