A long spell of controversy over the transfer of Reserve Bank of India’s reserves to the public exchequer—which started with the then Deputy Governor of RBI Viral Acharya’s statements—has almost been put to rest with RBI agreeing to transfer Rs 1.76 lakh crore to the Centre. This has been done as per the resolution of RBI’s Board of Directors on 26 August 2019, based on Bimal Jalan’s panel. Acharya at that point of time said that it would be highly dangerous to transfer RBI’s reserves to the government. After his statement, media and the opposition parties started raising questions on the Centre’s righteousness in seeking the transfer of RBI’s reserves.
In this context, a pertinent question arises: Who has the right over the accumulated profit—the reserves of RBI? As per Reserve Bank of India Act, 1934, the bank was to create a Reserve Fund of Rs 5 crore. Its Board of Directors had the power to decide the balance sheet. However, the Board has to take approval from the Centre for the same. Some years ago, RBI’s Board, under Section 47 of the Act, created an ‘Operational Reserve and Revaluation Account’ with an objective to take care of upheavals in the value of its assets and to fulfil its unforeseen needs. By June 2018, the reserves with RBI had reached Rs 9.63 lakh crore, which was nearly 28% of its total assets. No central bank in the world has so much reserve funds.
It is important to understand that a country’s central bank is no ordinary bank. Its credit risk is negligible, which means that its requirement of reserves is almost negligible. According to Prof Olivier Blanchard, former chief economist of the IMF, central banks can be run even on negative equity capital. Moreover, for maintaining the reserves kept by RBI, approval has not been taken from the Centre, nor has the Board made any framework for equity capital of RBI.
World over, the profits of central banks are transferred to their respective governments. Thus we can conclude that RBI’s right over its profits/reserves is not absolute. However, since huge reserves have been built over the years (without statutory sanction), a sudden transfer of these reserves, even partially, may cause problems. Therefore, we can have a discussion over the timeline and process of transfer. We need to understand that at the first instance, RBI does not need to keep such huge reserves; secondly, it doesn’t have the right to withhold its profits from the government, as society has a right over these accumulated profits.
At that point of time, Acharya had complained that if these reserves were transferred to the government, it may prove to be dangerous. He had even given the example of Argentina in this regard. But there were hardly any takers for his arguments. His statement was not taken seriously, because there is a huge difference between India and Argentina as far as financial management of the two countries is concerned. Argentina has defaulted several times in its repayment of foreign loans. Its credit rating is very low. It was believed that Acharya had tacit support from the then Governor of RBI, Urjit Patel. However, the former’s views were not appreciated by many people as such statements defame the country internationally.
Even as per the law of the land, only the central government owns the right over these reserves and profits of RBI. Moreover, RBI does not have the Centre’s sanction to create and maintain these reserves. The annual report of RBI in 2015 stated that the Board would make the framework for equity capital, but it has not been done so far.
When this debate about the transfer of RBI surplus to the Centre turned ugly, a six-member committee was appointed under former RBI Governor Bimal Jalan on 26 December 2018 to review the economic capital framework (ECF) for RBI. The finance ministry wanted the central bank to follow global practices and transfer surpluses to the government. It is notable that the finance ministry was of the view that the surplus to the extent of 28% of the gross assets maintained by RBI was well above the global norm of 14%.
In the past, this issue has been examined by three committees: V Subrahmanyam in 1997, Usha Thorat in 2004 and Y H Malegam in 2013. While the Subrahmanyam committee recommended building a 12% contingency reserve, the Thorat panel suggested a higher contingency reserve at 18%. RBI’s Board did not accept the recommendation of the Thorat committee and continued with the recommendation of the Subrahmanyam committee.
The Bimal Jalan Committee has noted that while a difference of views in the conduct of the central bank’s operations may occasionally arise, harmony in the objectives of the government and RBI is always needed. Though the committee has not spelt out the amount of transfer of RBI surplus, it has suggested the transfer be made in a phased manner, which is already a practice.
Now the Board has agreed to transfer Rs 1.76 lakh crore to the government, which include two components: Rs 1.23 lakh crore of surpluses for the year 2018-19, and an additional Rs 52,637 crore as per the revised economic capital framework recommended by the Bimal Jalan committee.
The debate has been settled from RBI’s side. However, the debate continues in the media and the opposition political parties about the transfer of funds. They continue to create the impression that the government has looted RBI of their reserves. This debate hardly has any substance, as those engaged in this debate are either unaware of the realities or they don’t wish to know of it.
(Ashwani Mahajan is Associate Professor, PGDAV College, University of Delhi. Email: ashwanimahajan@rediffmail.com)