RBI surplus formula tweaked, govt gets Rs 1.76 lakh cr windfall
The transfer from its surplus reserves follows recommendation from a panel named by the RBI.
The Reserve Bank of India (RBI) will transfer Rs 1.76 lakh crore to the government this fiscal, the central bank said after a board meeting.
The transfer includes Rs 1.23 lakh crore of surplus for FY19 and Rs 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 finalised 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 Rs 86,000 crore that the government will receive this year above its budgeted Rs 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 Rs 90,000 crore surplus transfer and this extra Rs 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 the RBI within the overall level of its economic capital, the statement said.
The committee defines economic capital as a combination of realised equity and revaluation reserves. RBI’s realised 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 Rs 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,” Pronab Sen, former chief statistician of India said.
The central board has also decided to set the economic capital level comprising of Contingency Fund and Revaluation Reserves as on June 30 at 24.5-20%.
In turn, the board has not touched the revaluation reserves, which comprises of periodic marked-to-market unrealised/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 Rs 1,23,414 crore for the year 2018-19, of which an amount of Rs 28,000 crore has already been paid as interim dividend, will be transferred to the Government of India. This is in addition to the Rs 52,637 crore of excess risk provisions which has 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 last year, to review the economic capital framework (ECF) for the RBI.
The government has already received Rs 40,000 crore during FY19. In February, RBI had announced a Rs 28,000 crore interim dividend, taking the total dividend transfer to the government to Rs 68,000 crore. The RBI central board is yet to approve the Rs 28,000 crore interim dividend.
The government has set a fiscal deficit target of 3.3% of the gross domestic product (GDP) for the current fiscal, revised downward from 3.4% pegged in the Interim Budget in February.
Sen said the sensible thing for the government will be to reduce the balance sheet and off-balance sheet borrowings using the additional transfer from the 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 the 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.
(As reported by Mint)
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