The transfer of ₹1.76 trillion by the Reserve Bank of India (RBI) from its coffers to the government does several important things. For one, it settles an argument over how much money RBI needs to keep for itself; the central bank says it has gone along with the recommendations of an expert panel headed by former RBI governor Bimal Jalan. For another, it fills the central exchequer with funds enough to either slash the Centre’s fiscal deficit—perhaps even bring it below its budget target for the year—or step up state expenditure to meet specific goals and stimulate economic activity. The money could well be used for a judicious mix of ends, the details of which would be for the government to work out. One way or another, it would be good for an economy that needs all the help it can get. But will the transfer be at the cost of a central bank left less robust than before? That’s a question that cannot be answered without a look at what RBI needs its reserves to guard against—for the sake of macroprudential stability.
One point to note is that ₹1.23 trillion of the transfer sum is simply RBI’s “surplus", the profits it made last fiscal year on interest earned, its investments in securities, and various market transactions. Its owner, the government, has a clear claim on these. RBI’s overall war chest, its “revaluation and contingency reserves", had nearly ₹9.2 trillion at the end of 2017-18, a chunk of it deployable in market operations to keep the Indian economy stable. The Jalan Committee was set up to suggest a formula for how much money is adequate for that purpose. The deliberations are now done, and RBI has said that after meeting the proposed adequacy conditions, ₹52,637 crore of “excess provisions" could be turned over to the government. While all this broadly means that RBI has opted to keep the very least it would need as firepower, the war chest itself has not suffered any significant depletion, as some had feared it would.
India’s central bank seems well equipped with resources to fight economic instability that could be wreaked by a financial crisis of the 2008-09 Great Recession’s proportions. With the reserves it has, similar bouts of capital flight would easily be dealt with. The likelihood of another such event is low, but rising, given the uncertainties that prevail across the world over how the US face-off with China over trade will play out. But what if there is a black swan event that shakes the world up? An escalation of trade hostilities could trigger a currency war, and if the dollar-based global economic order were to come apart, few can say what the consequences would be. Such an economic blowout is very unlikely at this juncture, but its impact would be so large that no scenario planner can ignore it altogether, and certainly not a central bank. If RBI’s reserves are to be kept to a minimal limit, it would need to be especially watchful of global risks. In any war-like situation, strategy often matters more than the size of one’s arsenal. To safeguard our economy, the government could project India as a neutral safe haven of sorts. The country could also stake a claim to those parts of global supply chains that are getting unhinged by the Sino-US straining of business relations. Plus, if world currencies were to slide, RBI could let the rupee decline as well, aiding our ability to stake that claim. A strong rupee serves our nationalistic ego well. What serves the economy, though, is not an ego, but an edge.