MUMBAI: The debate on what should be the amount of reserves the Reserve Bank of India (RBI) should hold has now moved to “fixing” the capital framework. But, the real issue is in fact a question on the net worth (accumulated profit) of RBI, said a former Finance Ministry official. He said there is a history to RBI augmenting its reserves.
“Seven years ago, the RBI Board decided that it needed to create reserves … keeping in mind that RBI should have AAA rating, so that if it wanted to borrow, it can borrow quickly. That time, the country’s rating was BBB-, just investment grade,” he said. RBI transferred more funds out of its annual profits to reserves until Raghuram Rajan’s tenure, when the existing reserves were considered adequate and the entire profits were transferred to the government. This has been reversed in the last two years, with reserves addition to contingency fund reducing the transfer to government kitty.
The need for RBI to keep its ratings high could be understood from the history of the country’s ratings, and how elusive ratings upgrades have been — Standard & Poor’s retained the country’s ratings at BBB-, even as Moody’s upgraded India by a notch from the lowest investment grade of Baa3 to Baa2 in 2017, first ratings upgrade for the country in 14 years.
“I don’t think it is in anybody’s wisdom that keeping the global economic scenario, anybody would like to reduce the size of the reserves. If at all in the wisdom of the Board it decided it has to be reduced, then if there is surplus money to be declared, that certainly can go to the government as dividend,” said the former official.
The law does not allow distribution of past reserves and it requires an amendment to the RBI Act, Y H Malegam, chartered accountant and an ex-RBI Board member told CNBC TV18.
Experts agree that there is no one fixed formula for the size of reserves that the Central bank needs to maintain or the percentage of reserves addition. Over the last two decades, several committees had been set up and parameters set. One committee suggested 12 per cent of contingency reserves, another 18 per cent and the last one headed by Malegam said it needs to be enhanced without giving a specific percentage.
If there is a need to revisit the formula, there has to be a cohesive reason for it, say experts. “I feel the RBI will also agree to this. However, there should be discussion on the elements and principles of the proposed formula. Once it is framed, the RBI will abide by it,” R Gandhi, former RBI deputy governor told PTI.
“But now the government is talking sense. Earlier, they were talking about reserves. Now, they are talking about norms to be reviewed. That is perfectly fine,” the official quoted earlier said.
Not everyone is in agreement with that. Former finance minister P Chidambaram on Sunday tweeted: “NDA government has competed 4 years and 6 months of its term. It has effectively 4 months left. What is the tearing hurry to “fix” the capital framework of RBI?”