Reserve Bank of India Governor Shaktikanta Das. Photo: AFP

The Indian Central bank has finally decided to go ahead with the controversial transfer of its surplus funds, amounting to 1.76 trillion rupees (US$24.51 billion), to the government.

For the past few years this issue has been a bone of contention between the Reserve Bank of India and the government, and former central bank governor Urjit Patel had even resigned over the same.

The Narendra Modi governments had contended that the central bank was sitting on a surplus that was much higher than required, whereas former central bank officials had cautioned that transfer of funds would upset the bank’s balance sheet and its ratings.

This transfer is being done as per the recommendations of a committee on Economic Capital Framework, headed by former Reserve Bank of India Governor Bimal Jalan.

The Reserve Bank of India decided to transfer a record 1.23 trillion rupees ($17.1 billion) of its surplus to the central government for the fiscal year 2018-19 or FY19 (July to June), and an additional 526.37 billion rupees ($7.3 billion) of excess provisions as recommended by the Bimal Jalan committee. The committee arrived at the latter amount after deciding to reduce the realized equity level of the balance sheet to 5.5%, from existing 6.8%. This resulted in excess risk provisions of 526.37 billion rupees.

The surplus transfer, commonly called “dividend,” is the highest ever and almost double the previous record amout of 658.96 billion rupees ($9.16 billion). In the previous year, the RBI transferred 500 billion rupees ($6.96 billion), while in 2016-17, the dividend was only 306.59 billion rupees ($4.26 billion) because of demonetization of high-value currency notes.

The proposed transfer amount of 1.76 trillion rupees could enable the government to kick-start a much needed public spending push, as well as possibly paring the fiscal deficit, estimated at 3.3 per cent of the GDP. The government was struggling to accomplish all this, due to shortfalls in tax income caused by the slowdown across various sectors.

Last year this issue had snowballed into a controversy with Urjit Patel and his deputy Viral Acharya opposing it vehemently. They saw this as a deliberate attempt to undermine the independence of the monetary authority. Acharya, too, resigned later.

After Urjit Patel resigned, he was succeeded by Shaktikanta Das, a career bureaucrat. A few weeks after Das took over as Reserve Bank chairman, Jalan was named chairman of the six-member committee on Economic Capital Framework.

The government had argued that Reserve Bank of India had a buffer of 28% of gross assets, which was much higher than the 14% followed by other central banks, and hence it needed to be reviewed.

In a statement, the central bank said: “The Jalan committee’s recommendations were based on the consideration of the role of central banks’ financial resilience, cross-country practices, statutory provisions and the impact of the Reserve Bank of India’s public policy mandate and operating environment on its balance sheet and the risks involved.” With the revised framework, Reserve Bank of India’s economic capital as of June 30, 2019, stood at 23.3%.

Earlier when this controversy broke out former central bank governors Raghuram Rajan and DV Subbarao had voiced concerns against the transfer of RBI funds to the government.

Rajan had warned that transfer of excess reserve to the government may bring down the rating of the central bank and such a downgrade would make borrowing costlier for the central bank, which will impact the entire economy.

Subbarao had said transferring central bank’s reserves only shows the desperation of the government. He pointed out that the risks undertaken by the Reserve Bank of India are different from other central banks and said it will not be entirely beneficial to draw from international practices. He had called for utmost caution while deciding on the transfer of funds.

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