Centre can't lay hands on RBI's existing reserves of Rs 9.59 lakh crore; ECF panel mandate limited to future reserves only

Centre will not be able to lay its hands on any of the Rs 9.59 lakh crore worth of RBI reserves despite the central bank agreeing to set up an expert committee on Economic Capital Framework (ECF) at the full board meeting held at RBI headquarters in Mumbai on Monday, sources told BusinessToday.In.

RBI has held its ground and has managed to protect the reserves, a bulk of which are currency and gold revaluation reserves worth Rs 6.91 lakh crore. Another Rs 2.32 lakh crore are under Contingency Fund; Rs 22,811 crore are under Asset Development Fund and another Rs 13.285 crore are under Investment Revaluation Account. Neither of these will be transferred to the Centre.

Instead, the Centre is believed to have agreed to RBI's resolve that the ECF Committee's mandate should be limited to examining how to utilise RBI's future reserves rather than past and current reserves. "RBI didn't want to do anything with the past reserves," an RBI director who attended the board meeting told BusinessToday.In. Earlier, reports that the Centre was insisting that one-third of RBI reserves worth over Rs 3 lakh crore be transferred to it were denied by the finance ministry.

RBI's reserves amount to nearly 28 per cent of its total assets. The global average is around 16 per cent. Centre believes RBI should maintain reserves amounting to 15-16 per cent of total assets, in line with the global average. Hence, ECF's new formula is likely work towards that end. Centre is believed to have demanded at least Rs 50,000 crore of surplus transfer from RBI this fiscal. It is likely that if fiscal 2018-19 surplus exceeds this amount, all of it will get transferred to the Centre's account.

Most likely, a vast majority of all future annual surplus of RBI will be transferred to the Centre until RBI's total reserves hit the global average of 15-16 per cent. Centre will have a substantial say in the ECF Committee, as disclosed by RBI in a statement right after the board meeting: "The Board decided to constitute an expert committee to examine the ECF, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI".

Also Read: Urjit Patel, Viral Acharya survive RBI board meeting; agree to many of Centre's demands

In last year's Economic Survey, former chief economic advisor (CEA) Arvind Subramaniam had said RBI is highly capitalised and there is no reason why excess capital should be kept with the RBI. "It is one of the most highly capitalised central banks in the world.  So, it would seem to be more productive to redeploy some of this capital in other ways," the Economic Survey said. The survey said this capital could be used in recapitalising banks or repaying debt to demonstrate that the government is serious about fiscal prudence. However, he was not in favour of using the RBI reserves to meet Centre's expenses: "the uses to which this is should be of a balance sheet nature".

Arvind Virmani, former Chief Economic Advisor, says the demand for higher share of current profits to be paid as dividends to the government is a legitimate demand. However, he says it would be a gross fiscal irresponsibility to convert legacy accumulated reserves into dividends for use for current expenditures. However, he feels the use of excess reserves to write off past loans from RBI to the government would help clean up the balance sheets of the RBI and the government. "This would be completely consistent with the government's approach to the two balance sheets and would have a positive effect on markets," he says.

Former deputy chairman of Planning Commission Montek Singh Ahluwalia says that while there are two views on the reserve issue with someone like Arvind Subramaniam saying that this can be done, the bottom line is that nowhere in the world transfer of funds from central banks is treated as a genuine way of modifying the fiscal deficit.

An economist from a rating agency, who refused to be quoted, said that a key question which remains unanswered is who should decide if the RBI has sufficient reserves. "Should the government decide this or should the RBI?" he asks.

Yet, the tug-of-war over RBI reserves leaves a critical question: is transferring reserves to the Centre a fiscal compulsion or a political necessity? If it's the latter, it better be left to the next government to decide in April-May, 2019!

Also Read: Here's what economists have to say on RBI surplus transfer to govt