The Reserve Bank of India (RBI) has established a six-member committee to review its economic capital framework, in coordination with the government. The committee, chaired by former RBI Governor Bimal Jalan, is tasked with evaluating existing provisions, reserves and buffers, and identifying whether they are in surplus or deficit. The formation of this committee comes amid disagreements between the government and central bank over various financial matters.
Committee Composition and Mandate
The Jalan Committee consists of well-renowned members including former Deputy Governor of RBI Rakesh Mohan (deputy chairman), Economic Affairs Secretary Subash Chandra Garg, RBI Deputy Governor N.S. Vishwanathan, RBI board member Bharat Doshi and RBI board member Sudhir Mankad. These experts will submit their findings within 90 days from the date of the committee’s initial meeting.
The core mandate of this committee is to assess the necessity and viability of various RBI provisions and to determine if the RBI maintains more or less than the necessary reserves and buffers. Additionally, the committee will suggest a suitable profit distribution policy considering all possible RBI scenarios.
Background: Government-RBI Face-off
The government and central bank have been at odds over multiple issues, including the relaxation of prompt corrective action norms for weak banks, establishing a special liquidity window for Non-Banking Financial Companies (NBFC), and transferring excess reserves to the government. The government insists on acquiring the surplus reserves from RBI to offset revenue shortfalls and fund welfare programs.
RBI’s Reserves Breakdown
| Reserve Type | Amount (in INR lakh crore) |
|---|---|
| Contingency Fund | 2.5 |
| Currency and Gold Revaluation Reserve | 6.91 |
The RBI’s reserves consist of a Contingency Fund amounting to Rs 2.5 lakh crore and a Currency and Gold Revaluation Reserve totalling Rs 6.91 lakh crore. The core reserve, the Contingency Fund, comprises only around 7% of total assets while the rest are primarily in revaluation reserves. Transfers from unrealised gains in the currency and gold revaluation reserve can only occur through a sale of gold or foreign currency assets.
Excess Reserves: A Debate
A significant part of the disagreement hinges on whether the central bank holds additional contingency reserves and if it should contribute further to these funds in the future. As per the RBI Act, all profits must be transferred to the government. However, the nature of these profits based on the accounting method used remains contentious.
Earlier in 2013-14, the RBI referred to a similar issue – to review adequacy of internal reserves and surplus distribution policy – to a technical committee headed by Mr. Y H Malegam. This led to the formulation of the draft Economic Capital Framework, which underscored the importance of adequate resources for central banks to perform operations like market intervention or acting as the lender of last resort. It also stressed that a central bank without sufficient buffers would have to depend on the government for recapitalization, potentially impacting its autonomy and the fiscal balance during crisis situations.
