Recommendations of Jalan Committee accepted
What is the size of RBI’s balance sheet?
- In 2017-18, the size of RBI’s balance sheet was Rs 36.2 lakh crore. Its balance sheet, however, is unlike that of a company.
- The currency notes it prints make up more than half its liabilities. Another big share, 26%, represents its reserves.
- These are invested mainly in foreign and Indian government securities (essentially promissory notes bearing an interest rate against which these governments borrow) and gold.
- The RBI holds a little over 566 tons of gold, which along with its forex assets make up almost 77% of its assets. Sometimes, the finance ministry and the RBI disagree on what level of reserves the RBI must hold to be consistent with its operations.
- The central bank has three different funds that together comprise its reserves. These are the Currency and Gold Revaluation Account (CGRA), the Contingency Fund (CF) and the Asset Development Fund (ADF).
- Of these, the CGRA is by far the largest and makes up the significant bulk of the RBI’s reserves. The fund, which in essence is made up of the gains on the revaluation of foreign exchange and gold, stood at ₹6.91 lakh crore as of financial year 2017-18.
- The CGRA has grown quite significantly since 2010, at a compounded annual growth rate of 25%.
- The CF is the second biggest fund, amounting to ₹2.32 lakh crore in 2017-18. It is designed to meet contingencies from exchange rate operations and monetary policy decisions and is funded in large part from the RBI’s profits. The ADF makes up a much smaller share of the reserves.
- This represents the amount RBI transfers to the government. There are two unique features about RBI’s financial statements.
- It is not required to pay income tax and has to transfer to the government the surplus left over after meeting its needs.
- RBI’s income comes mainly through interest on the securities it holds and in 2017-18 the largest component of expenditure was a provision of about Rs 14,200 crore it made to the contingency fund.
- Obviously, the larger the provision made to CF, the lower the surplus. Beginning 2013-14, RBI didn’t make a provision to CF for three successive years as a technical committee felt its “buffers” were more than enough.
- In the last two years, however, RBI has made provisions to CF. The adequacy of the current level of CF is one of the key issues likely to be debated extensively by the expert committee.
- The record surplus is because last year the RBI intervened in both markets — the forex markets where it sold dollars at a huge profit and the money markets where it conducted record open market operations (buying bonds), which earned it interest. Also, the Bimal Jalan panel has recommended an Economic Capital Framework for the RBI (similar to capital adequacy requirement for commercial banks).
- Based on this formula, the RBI has more capital than what it would need in a worst-case stress test scenario. This surplus capital of Rs 52,637 crore has been transferred to the government.
- This has been a contentious issue. The RBI and the Finance Ministry have been at loggerheads over how much should be transferred to the Centre.
- The government countered that the RBI had reserves far in excess of what the global norms were and, so, should transfer the excess.
- Finally, the government in November 2018 set up a committee under former RBI Governor Bimal Jalan to look into the issue. That committee submitted its report, and the recent transfers have been made on the basis of its recommendations.
- The Jalan Committee, is actually called the Expert Committee to Review the RBI's Extant Economic Capital Framework.
- The committee recommended that the RBI maintain a Contingent Risk Buffer — which mostly comes from the CF — of between 5.5-6.5% of the central bank’s balance sheet.
- Since the latest CF amount was about 6.8% of the RBI’s balance sheet, the excess amount was to be transferred to the government.
- The committee also decided, for the year under consideration, to use the lower limit of 5.5% of the range it recommended. So, basically, whatever was excess of 5.5% of the RBI’s assets in the CF was to be transferred. That amount was ₹52,637 crore.
- Regarding the RBI’s economic capital levels — which is essentially the CGRA — the committee recommended keeping them in the range of 20-24.5% of the balance sheet.
- Since it stood at 23.3% as of June 2019, the committee felt that there was no need to add more to it, and so the full net income of the RBI — a whopping ₹1,23,414 crore — should be transferred to the Centre.
- That ₹1.23 lakh crore plus the ₹52,637 crore is what comprises the ₹1.76 lakh crore that the RBI has decided to transfer to the government. It must be noted that this ₹1.76 lakh crore includes the ₹28,000 crore interim dividend earlier transferred to the Centre and does not come over and above it.