The Reserve Bank saves the day for the Government!

• The Centre gets almost double the requested budget from the RBI at 1.76 Lakh Crs against 90k Cr.
• The fiscal deficit target has been set at 3.3% of GDP for the current financial year.

The Reserve Bank of India (RBI) has taken a big leap to transfer its excess cash reserves along with the previous year’s dividend to the Government treasury, decided after a board meeting.

The reserves transfer includes ₹1.23 trillion of surplus for 2018-19 and ₹52,637 crore of excess provisions identified as per the revised Economic Capital Framework adopted at the meeting, RBI said in a statement on Monday. The higher surplus is due to the long-term forex swaps and the Open market Operations conducted by the central bank over the last fiscal.

The surplus transfer was finalized in line with the recommendations of the committee under former central bank governor Bimal Jalan. RBI’s central board accepted all the recommendations of the committee.

The additional amount of ₹86,000 crore that the government will receive this year above its budgeted ₹90,000 crore as transfers from RBI could be either used to provide fiscal stimulus to a sagging economy, reduce off-balance-sheet borrowings or meet the expected shortfall in revenue collections.

“It is a surprise to a certain extent because we had expected it to be a staggered payment to the government instead of everything in one shot. The budget expected a ₹90,000 crore surplus transfer and this extra ₹80,000 crore, to my mind, will act as a cushion against the possible shortfall in revenue collection in FY20,”

said Madan Sabnavis, chief economist at CARE Ratings

The RBI committee has recommended a surplus distribution policy, which targets the level of realized equity to be maintained by RBI within the overall level of its economic capital, the statement said.

The committee defines economic capital as a combination of realized equity and revaluation reserves. RBI’s realized equity, which is a form of a contingency fund for meeting all risks/losses primarily built up from retained earnings, currently stands at 6.8% and the Jalan committee recommends it to be in the range of 6.5-5.5% of the balance sheet. Keeping these recommendations in view, the central board has decided to set the realized equity level at 5.5% of the balance sheet, while transferring the remaining excess reserves worth ₹52,637 crore to the government.

The committee defines economic capital as a combination of realized equity and revaluation reserves. RBI’s realized equity, which is a form of a contingency fund for meeting all risks/losses primarily built up from retained earnings, currently stands at 6.8% and the Jalan committee recommends it to be in the range of 6.5-5.5% of the balance sheet. Keeping these recommendations in view, the central board has decided to set the realized equity level at 5.5% of the balance sheet, while transferring the remaining excess reserves worth ₹52,637 crore to the government.

The central board has also decided to set the economic capital level comprising the contingency fund and revaluation reserves as on 30 June at 24.5-20%.

In turn, the board has not touched the revaluation reserves, which comprises periodic marked-to-market unrealized/notional gains/losses in values of foreign currencies and gold, foreign securities and rupee securities, and a contingency fund.

Source: LiveMint