Background

  • The government has announced another committee to look at the economic capital framework for the Reserve Bank of India (RBI).
  • This looks like an unnecessary step, given that only a few years back in 2013-14 RBI had referred the matter to a technical committee headed by Mr. YH Malegam.
  • The terms given to the technical committee in 2013-14 included “to review the level and adequacy of internal reserves and surplus distribution policy of the RBI.
  • The current committee headed by Bimal Jalan is also charged with similar terms of reference.
  • The current government made an unreasonable demand to dip in to the accumulated surpluses and reserves of the RBI and much controversy and a resignation later, had to find a face-saving measure to wriggle out of the situation by referring the brazen act to a committee.

Tell us more about it

  • Even before Raghuram Rajan took over as the Governor, in 2012-13 a technical committee with Mr. YH Malegam as the Chair was appointed to look at the aspects of how the RBI balance sheet should be presented.
  • Soon after in 2013-14 a follow up technical committee was appointed to examine the level and adequacy of internal reserves and the surplus distribution policy.
  • Based on the report it was decided that RBI at that time held excess reserves.
  • The committee recommended that till such time the reserves were considered “excess” the complete surpluses should be transferred to the government as dividends.
  • Following the recommendations of the committee in the year 2013-14 RBI transferred its entire surplus to the Government of India.
  • This was a record amount of Rs.526.79 billion.
  • In the four years preceding RBI had transferred around 52% of its total surplus to the government. During 2013-14 it transferred 99.99% of its surplus.
  • It remained at 98% of the profits all the way for two more years and has been above 70% ever since.
  • Following the report of the technical committee that was chaired by Malegam, in 2014-15 a draft Economic Capital Framework was formulated.
  • This document highlighted the reasons why the RBI needs resources.

(a) market intervention operations
(b) carrying out the functioning of the lender of last resort
(c) to derisk the financial system.

  • It also highlighted the fact that if the central banks suffer losses and do not have adequate buffers they would have to depend on the Sovereign for recapitalization.
  • The dependence on the Sovereign had implications on the autonomy of the Central Bank as well as the concern that the Sovereign might not have the fiscal space in a crisis situation where the fiscal situation would in itself be under stress.