The Jalan committee strikes a good balance

With RBI’s Board accepting the Bimal Jalan committee’s recommendations on a prudent economic capital framework, the annual skirmishes between the Bank and the Government on surplus transfers will hopefully cease. The committee, after reviewing RBI’s finances and global practices, has recommended that the bank transfer ₹1.76-lakh crore to the Centre for FY19, comprising of ₹1.23-lakh crore from its net income for the year and ₹52,637 crore from past reserves. While this windfall is significantly lower than the ₹3-4 lakh crore that the Centre was angling for, it strikes a good balance between meeting the Centre’s fiscal needs and ensuring that RBI has adequate reserves to fulfil its wide mandate.

In evaluating the excess reserves on the RBI balance sheet, the committee has taken the pragmatic view that only realised equity built from profits must be distributed, while revaluation gains from market fluctuations on foreign currency, gold or other assets must be retained. The committee has thus upheld conservative accounting practises and ensured that the bulk of RBI’s legacy reserves (nearly ₹9-lakh crore going by the FY18 balance sheet) are ring-fenced from dividend demands. Likely market disruptions from RBI liquidating its forex or gold holdings have also been deftly avoided by effecting this transfer through a book entry. By ruling that the RBI already holds more than enough reserves to meet contingencies, the committee has enabled the Bank to share the bulk of its FY19 income with the Centre. Subjective judgments have been put to rest by pegging the RBI’s Contingent Risk Buffer at 5.5-6.5 per cent and its overall reserves at 20-24.5 per cent of its balance sheet. The latter capital requirement is high compared to RBI’s global peers (Economic Survey 2015-16 had cited a global median of 16 per cent). But given RBI’s role as a full-service central bank tasked with everything from monetary policy making to bank and NBFC regulation, a higher reserve level appears prudent. However, there are two grey areas in the committee’s prescriptions. It isn’t clear why the committee, having made a case for a contingency buffer, has pegged it at just 5.5-6.5 per cent, when earlier committees preferred 12 per cent. Prescribing a wide range for the required reserves instead of a definitive number, also tempts the Government to push RBI to make do with the lower end of the range, as it has done this year.

Having claimed an unusual windfall this year, it is important that the Centre doesn’t come to regard the central bank as a cash cow to be milked every year. There has been an unusual spike in the RBI’s net income in FY19, which is unlikely to be sustained. The Centre must also devise ways to use the surpluses gained from the RBI to create long term capital assets, rather than frittering them away on revenue expenses or sinkholes such as Air India and BSNL.

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