Booster shot: RBI’s Jalan panel may recommend Rs 50,000cr transfer from contingency fund

The Reserve Bank of India’s Economic Capital Framework (ECF) panel is expected to recommend a Rs 50,000 crore transfer to the Centre from its contingency fund, reports Zee Business.

Also known as the Bimal Jalan panel, the six-member committee was appointed on December 26, 2018, and entrusted to review the central banks’ capital reserves. The RBI has a surplus capital of over Rs 9.6 lakh crore.

The panel was formed at a time when the government and the central bank were involved in differences of opinion on the issue of RBI’s surplus transfer to the government.

The committee was to submit its report in 90 days from its first meet, which was held on January 8. Following this, the panel was given a three-month extension. It again deferred its report submission deadline till after the Budget. It will now submit its report this week to the RBI.

The controversy over the transfer of surplus reserves began after reports emerged that the government was seeking Rs 3.6 lakh crore from the RBI. The government at that point in time said it was only discussing a proposal to fix an appropriate ‘economic’ capital framework for the central bank.

It was reported that the government wanted to reset the current framework, if necessary, through recourse to a section never before used in the RBI’s 83-year history to free up Rs 3.6 lakh crore for transfer to the government.

The Finance Ministry was of the view that the buffer of 28 percent of gross assets maintained by the RBI is well above the global norm of around 14 percent. Following this, the RBI board at its meeting on November 19, 2018, decided to constitute a panel to examine the Economic Capital Framework.

In the past, the issue of the ideal size of RBI's reserves was examined by three committees -- V Subrahmanyam in 1997, Usha Thorat in 2004 and YH Malegam as late as in 2013.

While the Subrahmanyam panel recommended building a 12 percent contingency reserve, the Thorat panel suggested it should be maintained at 18 percent of the central bank's total assets.

The RBI board did not accept the recommendation of the Thorat committee and decided to continue with the recommendation of the Subrahmanyam committee.

The Malegam panel said the RBI should transfer an adequate amount of its profit to the contingency reserves annually, but did not ascribe any particular number.

According to a report of by Bank of America Merrill Lynch, the Jalan committee is likely to identify an excess buffer of up to Rs 3 lakh crore. This includes excess capital in contingency reserves and also revaluation reserves.

Halving of the contingency reserves to 3.25 percent from the present 6.5 percent will release Rs 1.28 lakh crore, the report said, adding the level is still 50 percent higher than what central banks in the BRICS (Brazil, Russia, India, China and South Africa) grouping have.

Similarly, halving the yield cover hike to 4.5 percent from the present nine percent will release another Rs 1.17 lakh crore, it said.

Besides former RBI Governor Bimal Jalan and Economic Affairs Secretary Subhash Chandra Garg, former RBI Deputy Governor Rakesh Mohan, Directors of RBI’s central board Bharat Doshi and Sudhir Makand, and RBI Deputy Governor NS Vishwanathan are also part of the panel.