The RBI Obliges - Government Nets "One-time” Windfall


We were deeply concerned late last year when the RBI-Government fracas was out in the open and we outlined our view through this article titled RBI Under Attack, which was written in the backdrop of Dr. Viral Acharya’s independence speech in October,2018, the controversial RBI Board meeting in November, 2018 and Dr. Patel’s resignation in December, 2018. Apart from opining on the issue of RBI’s independence, we compared the Balance sheet of the RBI with other global central banks to determine if and whether the RBI indeed has excess capital (See Table 2, Below).


We are glad to note the recommendations of the Jalan Committee report on the framework to determine the economic capital of the Reserve Bank of India. We have to always keep in mind that India remains an Emerging Market country with its own macro frailties and a government which runs a fiscal deficit on whom the RBI cannot depend on capital infusion if things go bad. The RBI thus needs to have its own sufficiently large capital buffer.


The Jalan committee, I believe, has put this matter to rest by laying down the following:


1. Any Surplus due to the government can be paid only from retained earnings and not by using the notional revaluation reserves.


2. The Contingent capital buffer has to remain at all times in a band of 5.5% - 6.5% of the RBI’s total balance sheet


3. The total economic capital of the RBI needs to be in the range of 20% - 24.5% of the RBI’s total balance sheet


The Point no.1 follows the normal accounting prudence of paying dividend only out of income and profit earned and not by profit accrued but not realized which shows up as Revaluation Reserves in RBI’s balance sheet, as explained in detail in our article link above.


Point no.2, is where the 52,637 crs has emanated from as the Board of the RBI decided to keep the Contingency Capital at the lower band of 5.5% and hence paid out the excess to the government. This also means that for it to pay it again, the contingency capital would have to rise above towards the 6.5% level for a fresh surplus to be transferred. This is why we believe this capital transfer to be a ‘one-time’ in nature.


Point no.3 details how the annual dividend of the RBI will be paid. For every year, if the economic capital is between the 20% -24.5% ranges, the entire annual surplus can be paid out to the government as dividend. This explains the INR 1,23,414 cr annual dividend for the period July 2018- June 2019. If there is no major movement in the market risk, credit risk and currency, one can expect that the RBI will be able to transfer a large part of its surplus to the government every year.


Table 2: RBI does have excess reserves, but those are not cash reserves

Source: Annual Reports of Central Banks, Classification into items is as per the authors understanding; # Euro GDP is of 19 countries which use the EURO as a Currency; Data for India is as of June 2018; UK is February 2018, rest all is as at December 2017



Arvind Chari is Head Fixed Income & Alternatives at Quantum Advisors Pvt. Ltd (QAPL).


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