HYDERABAD: The Reserve Bank of India-appointed Bimal Jalan committee may identify around Rs 1-3 lakh crore, or 0.5-1.5 per cent of the GDP, as surplus reserves, said foreign brokerage firm Bank of America Merrill Lynch (BofA-ML) on Monday.
According to the BofA-ML note, both the contingency and revaluation reserves of RBI are higher than the BRICS (association of economies of Brazil, Russia, India, China and South Africa) average and that transferring of this excess capital to the government could ease liquidity as well as help in lending rate cuts. On the other hand, an RBI internal study found that its capital buffers were below the global average of capital-to-asset ratio.
The BofA-ML added that the RBI Act doesn’t bar the central bank from transferring surplus capital to the government and that such a move won’t affect liquidity, provided it is used to recapitalise public sector banks.
“The surplus capital held in contingency reserves in net non-monetary liabilities can be transferred to government deposits, which draws this down to inject capital into public sector banks. The latter invests it in a government account parked with RBI, making the entire transaction liquidity neutral,” Indranil Sen Gupta, chief India economist at BofA-ML, said in the note.
The six-member RBI panel is likely to submit its report next month and the central bank is likely to deliberate on the findings of the report during its forthcoming meeting on May 21. The issue of excess capital created fissures between RBI and the government in the recent past, with the latter insisting on transfer of surplus reserves and the former taking strong objection to it. The face-off had also presumably prompted the then RBI governor Urjit Patel to step down in protest.
Meanwhile, BofA-ML also noted that RBI’s overall reserves are now capped at 25.5 per cent of the central bank’s books, above the Usha Thorat committee recommendation of 18 per cent and the Economic Survey’s 16 per cent. Lowering the cap to 20 per cent could release over Rs 1.9 lakh crore, it observed.
According to Gupta, if the cap for contingency reserves is halved to 3.25 per cent from the current 6.25 per cent, it will release Rs 1.3 lakh crore. Ditto with revaluation reserves, whose appreciation cover, if limited to 25 per cent, would release Rs 35,700 crore.