What constitutes the excess reserves of Reserve Bank of India

The Reserve Bank of India’s reserves have been a hot-button issue for long. The resource-crunched Centre has been looking to dip into the coffers of the RBI to meet its fiscal deficit target.

The Bimal Jalan Committee on Economic Capital Framework was set up last year to look into the central bank’s excess reserves and the surplus transfer to the Centre.

While the Centre was pinning its hopes on a one-time windfall gain, the committee has now proposed a staggered payout over three to five years, though the quantum of surplus is yet to be disclosed.

The current level of the RBI’s total reserves (2017-18) is about 26 per cent of its total assets. This is much higher than the Subrahmanyam Group’s 12 per cent recommendation in 1997 and Usha Thorat’s 18 per cent in 2004. So, what constitutes these much-talked about reserves of the RBI? The RBI mainly earns income from interest on government securities (G-secs) and foreign securities.

Net of expenses (which includes transfer to various reserves), the net disposable income is distributed to the Centre as surplus every year.

Breaking them down

According to the RBI annual report 2017-18, the central bank transferred ₹50,000 crore to the Centre in 2018.

The RBI’s reserves — currency and gold revaluation account (CGRA), the investment revaluation account (IRA), the asset development fund (ADF) and the contingency fund (CF) — amount to ₹9.59-lakh crore. The CGRA, which makes up the chunk of the reserves, has gone up substantially since 2010 — at a compounded annual growth rate (CAGR) of 25 per cent to ₹6.91-lakh crore in 2017-18.

It essentially reflects the unrealised gains or losses on revaluation of forex and gold. The fluctuations in the account are partly due to the gyrations in the rupee over the past few years.

The IRA is sub-divided into IRA-foreign securities (IRA-FS) and IRA-rupee securities (IRA-RS). The former reflects the unrealised gain or loss on mark-to-market of foreign securities while the latter is on account of marking rupee securities. It is important to note that until 2014-15, the RBI had only IRA-FS.

It was only from July 2015 that the RBI started to carry rupee securities at fair value and created the IRA-RS to reflect the unrealised gain/fall on mark-to-market of these securities.

Hence, there is a sharp bump up in the IRA reserves in 2015-16. In 2017-18, the sharp drop in these reserves was due to the increase in government bond yields during the year, impacting IRA-RS.

The ADF has been created to meet internal capital expenditure and make investments in subsidiaries and associated institutions. The CF is a specific provision made for meeting unexpected contingencies from exchange rate operations and monetary policy decisions.

Between 2010-11 and 2012-13, the RBI had set aside 32-45 per cent of its gross income to this fund. Additions to this fund though had ceased since 2013-14 and the entire surplus in the RBI’s coffers was being transferred to the Centre.

After a gap of three years, the RBI once again started transferring funds to its contingency fund from 2016-17.

The balance in the CF is about ₹2.32-lakh crore, which is around 6.4 per cent of the RBI’s total assets.

This is reportedly much higher than the 2 per cent average that other BRICS nations (Brazil, Russia, China and South Africa) hold, according to a Bank of America Merrill Lynch report.

The writer is an intern with BL Research Bureau