- The Centre is dwelling upon the burgeoning reserves of RBI which the central bank necessitates as an emergency buffer not meant to be shared.
- The RBI’s reserves are built through transfers from the annual surpluses in the profit and loss account of RBI.
- The balance surplus after transferred to reserves is given to the Centre as dividend.
- As of June 30, 2018, the RBI had ₹10.46 lakh crore in reserves, bulk of it under two heads currency and gold revaluation reserve (CGRA) (₹6.91 lakh crore) and contingency reserve (₹2.32 lakh crore).
- So the currency and gold revaluation reserve (CGRA) accounts for 19.11% of total assets and the contingency reserve for another 6.41% as of 2108.
- The level of CGRA now covers about a quarter of the total currency reserves of the RBI.
- Reasons for Centre’s demand on utilising RBIs reserves :
- To bridge its fiscal deficit.
- Centre needs more funds for recapitalisation of banks.
- To invest more in social sector schemes in upcoming election year.
- RBI’s arguments:
- Subrahmanyam Committee: In 1997 it suggested to keep a contingency reserves level of 12% of total assets.
- Usha Thorat Committee: In 2004, the committee suggested that currency and gold revaluation reserve (CGRA) should be 12.26% of total assets while the contingency reserve should be 5.5%, totalling 17.76% in all. But RBI didn’t accept the recommendations.
- H. Malegam Committee: On this committee recommendations, In 2013-14, then governor, Raghuram Rajan, decided to transfer the entire surplus in the RBI’s profit and loss account to the Centre without appropriation to reserves.
- At that time (2013-14),CGRA was 21.81% of total assets and the contingency reserve was 8.44%. The corresponding numbers now (2017-18) are 19.11% and 6.41% respectively.
- So by imputation, it can therefore be concluded that the buffer is now inadequate going by the Malegam Committee recommendation.
9. Aim of keeping reserves
- The CGRA is meant to control currency fluctuation or if there is a decline in the rupee value of gold.
- The contingency reserve is meant to cover depreciation in the value of the RBI’s holdings of government bonds (domestic and foreign), if yields rise and their prices fall.
- The reserve is also meant to cover expenses from extraordinary events such as demonetisation,money market operations and currency printing expenses in a year of insufficient income.
- The reserve is also a cover for the deposit insurance fund given that the Deposit Insurance and the Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of the RBI.
- Way forward:
- Form a committee with representatives from government, the central bank, academicians and the market.
- The committee should go into all aspects of the RBI’s balance sheet, suggest a safe buffer in reserves and set out a fair method of sharing the reserves, if at all they should be.