Breaking Views: Amid Slowdown, RBI Transfer Spells Relief for Govt

The Quint’s Editorial Director Sanjay Pugalia breaks down this decision and explains the mechanics behind the move.

(Photo: The Quint)

The Reserve Bank of India (RBI) on Monday approved the transfer of record Rs 1.76 lakh crore dividend and surplus reserves to the government, boosting the Prime Minister Narendra Modi-led regime's prospect to stimulate the slowing economy without widening fiscal deficit. This will help the government deal with the problem of fiscal deficit.

Governor Shaktikanta Das-led RBI central board gave its nod for transferring to the government a sum of Rs 1,76,051 crore comprising Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF), the central bank said in a statement.

The Quint’s Editorial Director Sanjay Pugalia breaks down the mathematics behind this decision and explains how it will work.

How Did the RBI Help?

The excess reserve transfer is in line with the recommendation of former RBI governor Bimal Jalan-led panel constituted to decide size of capital reserves that the central bank should hold. The government was represented by Finance Secretary Rajiv Kumar in the panel which finalised its report on 14 August by consensus.

Since 2013-14, the RBI has been paying 99 percent of its disposable income to the government, which is battling to rein in deficits.

The receipts from the RBI will give a fillip to the government’s efforts to boost the economy from a five-year low.

Finance Minister Nirmala Sitharaman had last week announced a slew of measures to prop up growth even as the government tried to stick to the target of keeping fiscal deficit at 3.3 percent of the GDP. The additional cash will now give the Centre more headroom for stimulating the economy.

The government will get a higher dividend of Rs 95,414 crore during the current fiscal as against the estimate of Rs 90,000 crore.

The huge sum of money granted to the government will act as its lifeline, says Pugalia.

Pugalia also points out that there had earlier been a huge debate over the government asking the RBI for money, and that then RBI governor Urijit Patel had resigned from his post amid the controversy.

What Does This Step Mean?

So far, the RBI’s mandate was that it would keep 12 percent reserve capital. The RBI's provisioning for monetary, financial and external stability risks is the country's savings for a 'rainy day' (a monetary/financial stability crisis) which has been consciously maintained with the central bank in view of its role as the monetary authority and the lender of last resort.

It has now been recommended to be maintained within a range of 6.5 percent to 5.5 percent of the RBI’s balance sheet, comprising 5.5 to 4.5 percent for monetary and financial stability risks and 1.0 percent for credit and operational risks.

Given that the available realised equity stood at 6.8 percent of balance sheet, while the requirement recommended by the committee was 6.5 percent to 5.5 percent of balance sheet, there was excess of risk provisioning to the extent of Rs 11,608 crore at the upper bound of Contingent Risk Buffer (CRB) and Rs 52,637 crore at the lower bound of CRB.

The Central Board decided to maintain the realised equity level at 5.5 percent of balance sheet and the resultant excess risk provisions of Rs 52,637 crore were written back. Pugalia says that if the RBI were more cautious about its balance sheet and about its autonomy, then it would have decided to maintain the equity level at 6.5 percent and the government would have received less money. But the government desperately needed money, and the move will bring relief.

Relationship Between Centre & RBI

Pugalia stresses that the impact of this move is that the government has gotten some relief after getting some money and it will also help the Centre maintain the numbers that they have projected in the Budget.

While one of the questions raised by this move is whether it shows that the differences between the RBI and the Centre have been resolved, it also raises questions about the autonomy of the Central Bank and whether it has now become a subordinate of the government.

(With inputs from PTI.)