Accumulated Capital of RBI Rs. 15 lakh Crores- Savings for Rainy Day or National Waste?

 

ACCUMULATED CAPITAL OF Rs. 15 LAKH CRORES UNDER

THE ECONOMIC CAPITAL FRAMEWORK OF RBI

“Savings for the Rainy Day” or a National Waste?

 

#subhashgarg  #economiccapitalframework #RBIcapital #RBIsurplus #bimaljalancommittee

SUBHASH CHANDRA GARG

Economic, Financial and Fiscal Policy Strategist and Former Finance and Economic Affairs Secretary, Government of India

 

Reserve Bank of India Liabilities/ Sources of Investible Funds Are Made Up of Essentially Two- Reserve Money and Accumulated Capital

Reserve Bank of India, like other currency issuing central banks, is the child and regulator of fiat currency. The main function of the RBI is to issue currency, which constitutes its primary liability. In addition, the RBI keeps bankers’ and some ‘other deposits’ of the monetary nature, which when added to the currency with the public makes the currency base of the country, also called the Reserve Money.

The reserve money is the principal and the only real liability of the RBI. RBI, like in case of all other central banks managing the fiat currency and enjoined by the law, is required to keep ‘reserves’, made up of permissible assets, equal to its currency and reserve money liabilities. The reserves, at least as legal fiction, provide an assurance to the public that in the unlikely event of the public/depositor demanding ‘value’ of the currency issued and other deposits held by RBI, the RBI would pay up by ‘encashing’ the reserves.

The remaining net liabilities of the RBI are nothing but the accumulated capital of the RBI. There are thus two real parts of the liabilities side of the RBI balance sheet- the reserve money liabilities and the accumulated capital. RBI, however, does not present its Balance Sheet in this clearer manner.

RBI’s Balance Sheet is divided in two parts- first, the Balance Sheet of the Issue Department, responsible for issuing ‘currency’, not the full ‘reserve money’ and second, the Balance Sheet of the Banking Department, which basically records the assets and liabilities of the banking function which RBI discharges. RBI’s banking function relate to RBI acting as a banker to the central government and state governments and as a banker to the banks.

The accumulated capital of RBI remains housed in the Banking Department. The Government has invested only Rs. 5 crores as capital in the RBI. The size of RBI’s gross assets and liabilities as on 30^th June 2020 was Rs. 53.3 lakh crores.

The net assets and liabilities of the Issue Department were Rs. 26.4 lakh crores. RBI held reserves in the form of foreign currencies of Rs. 25.2 lakh crores, gold bullion and coins of 1.1 lakh crores and rupee coins of 785 crore. The gross assets/liabilities of the Banking Department were Rs. 26.99 lakh crores at the end of RBI’s financial year 2019-20.

RBI’s Reserve Money at the end of FY 2019-20 was Rs. 31.63 lakh crores (currency in circulation of Rs. 26.60 lakh crores, Bankers’ deposits with RBI of Rs. 4.64 lakh crores and ‘other deposits’ of Rs. .39 lakh crores). The net accumulated capital of RBI as end 2019-20 was Rs. 15.1 lakh crores, largely included under the head “Other Liabilities and Provisions”.

In a nutshell, RBI’ net balance sheet of Rs. 46.5 lakh crore at end June 30, 2020 comprised two principal liabilities- the reserve money liabilities of Rs. 31.63 lakh crore and accumulated capital of Rs. 15.1 lakh crores.

RBI has About 50 Lakh Crore of Investible Corpus and Earns Paltry Return on Its’ Investment

RBI’s liabilities- reserve money and accumulated capital- are, in fact, two large pots of investible funds. The reserve money has two further pots of investible funds- the funds received against currency issued and the funds received as deposits from the banks against their CRR and other obligations. The RBI Act regulates only the investment of currency issuance proceeds in defined kinds of assets. There are no regulations for the investment of deposits part of the reserve money and also for the assets of the banking department.

A simple reading of the RBI Act and its provisions makes it clear that the RBI has full freedom to make investments of about Rs. 50 lakh crores worth of funds it has. Mandatory holding, in the form of foreign securities, gold and gold coins etc. at Rs. 200 crores only, is too small to make any difference.

RBI earned a surplus of Rs. 1.50 lakh crore (including profits from sale of investments) in the year 2019-20 on an asset base of Rs. 53.35 lakh crore, giving a return of 2.8%. In the previous year, the return was higher at 3.42% (Rs. 1.40 lakh crore over the asset base of 41.03 lakh crore, thanks to very large income on account of sale of investments yielding large capital gains). In the previous three years, the rate of return was only 2.49%, 1.87% and 2.16% respectively. On an average, RBI earns gross income of about 2.5% on its assets.

The interest earned on domestic assets amounted to 5.20% in 2019-20. The interest earned on foreign assets amounted to 1.36% only.

Investment in Foreign Currency Assets is Mainly Responsible for RBI’s Low Returns on Investments

RBI’s low returns on its investment portfolio are largely explained by RBI making bulk of its investment portfolio in foreign securities and these securities earning real small returns for RBI.

RBI invested 75% of its investible funds in foreign securities in 2019-20 earning only 1.36% returns. The international investment returns are trending much lower in the current year of 2020-21. RBI may end up getting only about 1-1.25% returns on its foreign investments in 2020-21.

RBI’s 2019-20 foreign assets portfolio was of Rs. 35 lakh crores yielding 1.36% return, whereas domestic assets portfolio of about Rs. 12 crores earned 5.2%. 3.86% lower return on foreign assets portfolio of Rs. 35 lakh crores amounted to income loss of 1,35,100 crore even at the rate of RBI’s returns on domestic assets. This is a staggering cost of maintaining RBI’s reserve assets and investing accumulated capital in low yielding foreign currency assets.

RBI Act Provides Five Crore Only as Capital

Section 4 of the RBI Act is a very short straight forward section. It says “The Capital of the Bank shall be five crores of rupees. This Section has stood the way it is since 1.1.1949, the date with effect to which the RBI was nationalised from a private company by the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. Section 5, which provided for increase and reduction of share capital, before the RBI was nationalised was repealed from the RBI Act also in 1948.

The Capital of the RBI is Rs. 5 crore and it cannot be increased or decreased. The RBI has discharged all its obligations and has run up a portfolio of assets of Rs. 50 lakh crores in last 72 years. Capital has never been a constraint on the ability of the RBI to carry out its functions.

Accumulated Capital of RBI is Over 15 Lakh Crore

RBI Balance Sheet for 2019-20 rightly notes the Capital of RBI at Rs. 5 crores. It has three other entries which, together with capital of Rs. 5 crores amount, constitute total accumulated Capital of RBI- first, the Reserve Fund of Rs. 6500 crores, second, Other Reserves of Rs. 232 crores and, finally, “Other Liabilities and Provisions” of Rs. 15,16,621 crores. Together, all these add up to Rs. 15,23,358 crores. The Other Liabilities and Provisions have twelve items (Schedule 3 of RBI Balance Sheet).

One way of re-organising and looking at the non-monetary liabilities or the accumulated capital of RBI is to divide the 15 items mentioned in the Balance Sheet, including 12 items under the head “Other Liabilities and Provisions” of Rs. 15,23,358 crores in three parts- the capital which represents largely valuation gains, the capital which represents provisions made for actual/contingent real liabilities and the capital which represents accumulated profits or the surpluses which were retained and not transferred to the Government of India.

Accumulated valuation gains were Rs. 11,24, 390 crores. Realised and retained profits amounted to Rs. 2,93,646 crores (Contingency Fund of Rs. 2,64,034, Capital of Rs. 5 crore, Reserve Fund of Rs. 6500 crores and Other Reserves of Rs. 232 crores). The remaining amount of Rs. 1,05,322 crores (including Rs. 57,128 crores to be transferred to the Government of India) represented provision for liabilities.

“Economic Capital Framework” of RBI

RBI currently follows an “economic capital framework”, based on the recommendations of the Bimal Jalan Committee. The RBI Act provides only for capital of Rs. 5 crores and does not provide for any economic capital framework.

The “economic capital framework” is framed in quite complex terminologies- kind of unnecessary intellectual gymnastic. However, its outcome has lot of practical value as this decides how much of the surplus RBI earns every year would be retained by the RBI and howe much is transferred to the Government of India.

There are two parts of the Economic Capital Framework (ECF). The first part of ECF determines how much valuation provisions should be there to take care of the “market risk” RBI is subject to in case there is downward movement in the value of the securities and gold in future.

The Committee recommended a methodology described as “Expected Shortfall under Stressed Conditions with target of 99.5% Confidence Level and lower risk tolerance limit of 97.5%” for measuring the market risk of RBI’s assets portfolio to determine valuation provisions required as a proportion of the total balance sheet of RBI.

The second part of the Economic Capital Framework relates to how much “realised equity” or the retained profits the RBI needs to keep for meeting the “monetary, financial and external stability risks” and also to cover “credit risk and operational risk”. The Committee recommended that the RBI should maintain a Contingent Risk Buffer of 5.5% to 6.5% of the RBI’s Balance Sheet to take care of these risks.

The Committee further recommended that the valuation reserves (for market risk) will not be distributed even if these are higher than the required reserves. However, if such valuation reserves happen to fall below the required level, to the extent of shortfall, additional realised reserves would be required to be maintained.

RBI Assets Suffers No Real Valuation or Market Risk In Fact

RBI defines market risk related to assets it holds in terms of likelihood of the rupee value of these assets depreciating. Depreciation in value of three principal assets of RBI- rupee securities, foreign securities and gold- is the valuation risk for RBI. The largest assets are foreign securities- approximately $500 billion (about Rs. 37 lakh crores)- at the end of September 2020. The rupee securities make up the second largest share of RBI’s assets- approximately Rs. 12 lakh crores at the end of September. The gold is the third largest assets- about Rs. 2.75 lakh crores.   

Market risk related to foreign currency assets of RBI is defined in terms of its rupee value depreciating. Rupee value of dollar assets depreciates when rupee appreciates. Therefore, if RBI expects the rupee to appreciate, it would be required to hold provisions for foreign securities. The Economic Capital Framework requires RBI to hold large provisions to cover this risk. It might seem strange, that strengthening of rupee vis-à-vis foreign currency indicates stronger nation, but for RBI, it is loss of valuation and for such potential loss RBI’s capital framework mandates RBI to hold provisions.

Market risk related to the government securities which RBI holds is more conventional. Whenever the interest rate of the government securities RBI holds goes up, value of RBI’s holding of government securities goes down. Reverse effect takes place when interest rates go down. Setting interest rates in the economy is the primary function of the RBI- the monetary authority of the country. Normally, RBI raises interest rates to cool down inflation and such action takes the interest rates towards more neutral interest rates, but RBI capital framework mandates RBI to hold provisions for the interest rate risk until RBI fixes it.

The gold is held by RBI for as currency reserve asset and also for it being ever-green and secular standard of value. RBI has never sold gold for rupee. As gold is basically held as reserve asset, RBI in fact buys gold by issuing rupees. RBI’s gold is like ‘held to maturity’, which in case of gold is forever. Yet, the capital framework mandate to hold provisions for potential loss of gold value in rupee terms.

None of the RBI assets actually suffers any real potential market or valuation risk.

Inscrutably Complex Formula for Market/Valuation Risk Was Designed to Ensure A Good Part of Surplus Remains with RBI

The formula recommended by the Jalan Committee and accepted by the RBI results into required provision for market risk of about 17% of the assets. 17% of RBI balance sheet amounted to about Rs. 9 lakh crores of provision required at the end of financial year 2019-20. Massive amount of provision for non-existent risk!

The RBI Act, before amendment in 1955 permitted RBI to make provisions for “such other contingencies—. This was deleted and the RBI Act since then provides that RBI can make provisions which the bankers normally make. Central Banks don’t and are not, in the very nature of things, expected to make any provision in the possible erosion in the value of reserve assets.

RBI, however, over the years, wanted to hold provisions and therefore leaned on different formulas to determine the amount of provisions which can be made. RBI Board, in 2016, had decided to measure market risk by adopting a super complex formula built around three elements.

First element is the measure of Value at Risk. Traditional model of determining Value at Risk (VaR) is maximum asset value which had historically suffered loss. A variation of this is the Stressed Value at Risk (S-Var), which selects the value at risk under ‘stressed conditions’ mostly defined subjectively. Another variant is Estimated Loss (EL) method which take into account the remaining amount of asset assumed as at tail end risk. Second element is the confidence level you choose at which such events which put value at risk might occur.  The third element is the interval which you adopt at which the loss event might take place. RBI in 2016 decided to adopt Stressed-Var and .9999 confidence level and 10 days interval. This formula was supposed to make RBI has the best of the credit rating- better than the best of the AAA rated sovereign. While no central bank was rated by the credit rating agencies in the world, the RBI wanted to be internally assessed as having the best credit rating in the world.

The formula yielded a value of about 24% of assets as required reserves/provisions for valuation loss. The RBI Board further decided to hold up to 4% of the Balance Sheet size as realised equity. RBI adopted the toughest and most conservative formula to yield an amount of provisions which would almost always be greater than the available reserves and the surplus generated in a year. The formula provided justification for RBI to hold all the profits/surplus with it. If the RBI had gone by the formula of determining provisions required, the RBI was not required to transfer any surplus to the Government during the financial year 2016-17 and 2017-18.

The Government took exception to this and raised questions about the appropriateness of the formula which produced result to make the economically justified and legally mandated position that that all surpluses of RBI are to be transferred to the Government. The questions raised by the Government led to constitution of the Bimal Jalan Committee.

Bimal Jalan Committee reduced the rigour of the market/valuation risk formula somewhat. Instead of 24% of assets, the Jalan Committee formula requires 17-18% of the balance sheet size to be the market risk provision. Bimal Jalan Committee, however, made this subject to one additional condition. The Committee said that the available provisions, if these are in excess of required market risk provisions, would not be distributed as surplus. However, if the available provisions are less than the required provisions, then to the extent of shortfall, even surplus in excess of realised reserves requirement would not be distributed. As the whole purpose of the complex exercise of determining required market/valuation provision was to prevent distribution, this condition has made the whole formula redundant. The net results of the market risk intellectual gymnastic is that the valuation provisions are not to be touched. Period.

RBI Needs No Capital for “Monetary, Financial and External Stability Risks”

The RBI Board decision accepting Bimal Jalan Committee report cites “monetary, financial and external stability risk” in view of “RBI’s role as the Monetary Authority and the Lender of Last Resort” as the rationale for retaining “realised equity”. Realised reserves or equity is the accumulated non-distributed surpluses.

A reading of the long report of the Bimal Jalan Committee makes one realise that the Committee invented every possible excuse for holding on to as much of realised equity/reserves as could be possible.

The role of RBI as Monetary Authority requires RBI to issue currency and manage reserve currency base (currency with the public and bankers’ deposits with RBI). The money supply is managed by modulating currency issuance and determining the appropriate level of deposits which bankers are required to be kept with RBI. Both these are currency issuance and regulatory functions. These functions are discharged by increasing or decreasing money supply. This requires RBI to hold no capital or provisions. In fact, holding of capital and provisions are ‘non-monetary’ in nature. Any funds held by RBI as capital or reserves has to be invested in some assets. The monetary supply cannot be influenced by capital and reserves. The capital, reserves or realised equity has no role whatsoever in discharge of RBI’s function as “Monetary Authority”.

Being bankers’ regulator (though not under the RBI Act but under Banking Regulation Act; in many countries’ central banks are not banking regulators) vests RBI with important role in maintaining credit and financial stability of the country. The RBI is also a “lender of the last resort”. The RBI, as a central banker, can provide liquidity/ credit to banks even when the credit system has frozen and banks are in danger of collapsing on account of liquidity squeeze. RBI discharges the lender of last resort function by creating more money- by issuing more currency or increasing banks’ deposits with itself to be used whenever the banks want. Both these measures of coming to the rescue of bankers as the lender of the last resort, however, do not require RBI to use any capital. RBI uses its monetary authority not its capital to discharge these functions.

An argument has been made in the Bimal Jalan Committee Report that RBI might suffer loss on the credit it provides to banks as lender of last resort in case the banks default to RBI. Banks never default to the Central Bank. Even when the banks go bankrupt, the equity holders and depositors might suffer, but the central bank is unlikely to face default. The Government might have to pump in capital, but the Central Bank never suffers. RBI has never faced such a default and is unlikely to see such an eventuality ever. Offering the function of the lender of last resort as the reason for holding realised surpluses undistributed is nothing except an intricately designed but empty excuse.

The last of the argument offered relates to foreign exchange management. RBI buys foreign currency assets using funds arising out of two basic pool of resources- first, the funds generated by the issuance of currency/reserve money and second, the funds retained as capital- both realised and unrealised equity.

The reserve money supply, nominal value of currency in circulation and the bankers deposit with RBI, does not change on account of any change in the value of the reserves’ assets procured against the money supply. Therefore, even if there is change in the rupee value of foreign currency assets, the money supply remains unchanged. There is no way or need for RBI to use realised equity to provide for valuation change in the foreign currency asset held as reserve assets.

The argument to provide for valuation change in the foreign currency assets by using provisions out of realised equity is a poor circular argument. First, RBI uses accumulated capital/reserves to buy the foreign currency assets and then require accumulated reserves to provide for loss in valuation of foreign currency assets. If there is no accumulated profits/equity to buy the foreign currency assets, there will be no loss in valuation of such assets and consequently no need to provide for provisions for such losses.

Look at any which way, there is no justification or requirement for the RBI to hold any reserves/provisions for managing its monetary authority, lender of last resort, foreign exchange management function. All these arguments are nothing but hogwash, created only to somewhat make it appear to everyone else that there are weighty reasons for RBI not to distribute profits and retain the same with itself.

National Savings for a Rainy Day or National Wastage

Final justification used by the Bimal Jalan Committee for RBI’s provisioning for monetary, financial and external stability risk was that such provisioning is like “the country’s savings for a ‘rainy day’ (a monetary/financial stability crisis)”.

Implicit in this phraseology is that the realised equity/ accumulated surpluses are national savings which can be used in times when the country is faced with major monetary or financial stability crisis. It is prudent for individuals, households and businesses to set aside some profits for investments or for use during difficult/crisis times. On the same analogy, possibly, the argument was offered that if the surpluses generated are distributed to the Government, these will get used up in meeting some public expenditure. Governments do not save and therefore if RBI retains the surplus, this would constitute national savings.

There are two issues connected with this reasoning. First, whether it is advisable to use the surplus to meet legitimate public expenditure need now or retain it with the RBI to meet legitimate public expenditure in future during monetary or financial stability crisis. Second, whether deploying such savings in foreign currency assets is the most prudent means of growing savings.

The central government is acutely short of fiscal resources to meet the legitimate public expenditure needs. The central government borrows and services debt. Therefore, if RBI saves its surplus and does not distribute it to the Government, an equal amount is borrowed by the Government for meeting its deficit. Therefore, taken together, there is no national savings when RBI retains surplus.

The RBI invests these savings primarily in the foreign currency assets. These assets have yielded less than 1.5% return in 2019-20. This year, these are expected to yield about 1% only. The Government’s borrowing cost last year was about 7%. This year is expected to be about 6%. The nation therefore loses 5-6% of returns on RBI retaining its surplus as savings and then investing it in the foreign currency assets. A 5% loss on Rs. 15 lakh crores of retained equity is Rs. 75000 crores. A 5% loss on realised equity balance of Rs. 2.6 lakh crores as on 30^th June, 2020 is over Rs. 11000 crores. The Government would have saved this much amount if the Government had borrowed less amount equal to surplus retained as savings by the RBI.

Therefore, even when you take into account investment of accumulated capital as “national savings”, the nation loses at the minimum Rs. 11000 crore and at the maximum Rs. 75000 crores. Certainly, not a prudent situation to be in. It is national waste, not national savings, when RBI retains its surplus with itself.

RBI Capital Framework- A Very Bad Deal for Government

RBI needs no capital for its monetary, banking and foreign exchange policies and regulation. Retained profits yield excessively poor returns. Therefore, functionally or from investment perspective, retaining surplus is an unnecessary and poor policy option.

Almost all the profits RBI makes come out of the discharge of sovereign function of currency issuance- difference in the returns earned on currency reserves assets and the cost of printing and managing currency. The governing law- the RBI makes it abundantly clear- RBI will have capital of only Rs. 5 crores and all surpluses would be transferred to the Government.

Yet, the RBI has successfully manoeuvred to keep Rs. 15 lakh crores of provisions with it- roughly Rs. 12 crores of valuation provisions and Rs. 3 lakh crores of cash realised surpluses. The Bimal Jalan Committee again worked out a bad deal for the Government. It used two stratagems to achieve this objective.

First, it took valuation reserves completely out of reach of the Government. The recommendation that if the required valuation reserves are less than the available valuation reserves, the excess, even if of durable nature, would not be available for distribution meant that the accumulated profits in the form of valuation gains would not be available to Government as surplus.

It is, incidentally, only a matter of accounting that valuation gains are realised gains or unrealised gains. Last year, when the RBI wanted to give higher distribution to the Government, to make it look that the Bimal Jalan Committee had been very favourable to Government, RBI simply swapped foreign securities with accumulated profits with the new securities at current prices. The difference, over Rs. 50000 crores, of valuation gain got converted into the realised gain and the RBI paid that as a dividend to the Government. Therefore, as far as the economic capital framework recommended by the Bimal Jalan Committee is concerned, valuation gains of over Rs. 12 lakh crores are out of reach of the Government. However, if you want to distribute some part of it, all that is required to be done, is to swap the old securities with accumulated gains with same securities at current prices.

Second, the RBI in terms of functional requirement, need no capital reserves for monetary, financial and external liabilities management. Yet, in 2016, the RBI had decided to maintain balance equal to 3-4% of the assets as realised equity in the Contingency Fund. Bimal Jalan Committee, instead of lowering this unnecessary requirement, raised it to 5.5%-6.5%.

Available Contingency Fund/ realised equity balance exceeded 7% of the assets as on 30th June, 2018. The logic of the Committee recommendation was to deprive the Government of the accumulated realised profits as much as possible out of about Rs. 2.4 lakh crores.

As the requirement of realised equity would rise every year @5.5%-6.5% for the increased assets of RBI, to this extent the surplus would have to be retained by the RBI. If the assets base rise by Rs. 10 lakh crores, Rs. 55000-Rs. 65000 crores of surplus would be retained by the RBI.

The net effect of both the recommendations was that the Government would never get 100% of surplus in future and in most years, about 50% or more of the surplus would be retained by the RBI to be invested in low yielding foreign currency assets. The Government would have to suffer. A real bad deal for the Government and also nation!

RBI Will Soon Have to Revisit Economic Capital Framework

Ever since the RBI decided to retain part of the surplus with itself and not transfer it to the Government, the tussle between the Government and the RBI commenced on this issue. The Government wanted all of the surplus of year. The RBI wanted to retain as much of the surplus as possible.

The tug of war has been quite pronounced and intense since 2012. The RBI did not distribute full surplus for quite a few years until 2012. When the Government wanted more of the surplus to be transferred, Malegam Committee was appointed and after going through accounts of RBI, the Committee recommended that 100% of the RBI surplus to be transferred to the Government for three years (2021-13, 2013-14and 2014-15). The Government got 100% of the surplus for these three years.

RBI, with intent to find a way to retain some surplus, came up with an internally designed Economic Capital Framework in 2015-16. This required a very large proportion of assets of RBI to be maintained as provision. However, the accumulated surpluses were quite high in 2015-16 also. Therefore, for the year 2015-16, while the new capital framework was adopted, RBI transferred the entire surplus of Rs. 65,876 crores for 2015-16 as well.

The sting of new economic capital framework started biting in 2016-17. The framework calculations suggested that no amount out of the Rs. 43,803 crores could have been transferred to the Government. It was too sudden and too big a departure from the practice of previous four years. The RBI, realising that some via-media had to be found, came up with a staggered surplus distribution policy. This policy linked the amount of surplus to be transferred to the extent of surplus and shortfall in the available equity over the required equity. Rs. 30, 663 crores out of the surplus was transferred, retaining Rs. 13,140 crores. This began the next round of tussle. In 2017-18, with Government’s intense pursuance, the staggered surplus distribution policy was further diluted and an amount of Rs. 50,004 crores out of total surplus of Rs. 64,194 was transferred. 2018-19 witnessed the tussle at its highest level leading to appointment of Bimal Jalan Committee. RBI transferred not only 100% of the surplus (Rs. 1,23,354 crores, which included artificially generated profits of over Rs. 50000 crores) but also the excess of realised reserves of Rs. 52,637 crores.

RBI succeeded in retaining some surplus in the year 2016-17 and 2017-18, but the Government got more than the surplus, for the first time ever, of a whopping Rs. 1,75,991 crores.

Like the Economic Capital Framework of 2015-16, which resulted in transfer of 100% surplus of 2015-16 to the Government despite being a very hawkish kind of framework designed to retain surplus for the RBI, the Economic Capital Framework of 2019-20, delivered 100% surplus of the year 2018-19 to the Government. However, like the Economic Capital Framework of 2015-16, which started hurting the Government in 2016-17, the Economic Capital Framework of 2019-20 has struck in the distribution of surplus of 2019-20.

The RBI has retained Rs. 73,615 crores out of the surplus of Rs. 1,30,747 crores of the RBI financial year 2019-20. There has not been any public protest by the Government at this treatment. However, the retention of 56% of the surplus, amounting to Rs. 73,615 crores, is quite a large amount, more so in the current year of Covid-19 impacted economy and finances.

There is no doubt the tussle will start soon and the Government will again seek a review of the Economic Capital Framework recommended by the Bimal Jalan Committee. It would be in the national interest to do it as soon as possible.

 

 

SUBHASH CHANDRA GARG

NEW DELHI 09/10/2020