TRANSFER OF RBI’S SURPLUS TO THE GOVERNMENT

INTRODUCTION
The RBI, as other national banks, credibility, autonomy, and effectiveness of its policy
actions. The RBI is counterparty in numerous money related exchanges and is relied upon to
convey on its commitments even in the most noticeably terrible conceivable economic situations
and times for the nation. As a result, the RBI needs to have an extremely resilient balance
sheet. That is, the RBI needs satisfactory capital reserves and different supports that it can use
to stabilize the economy during times of trouble.

In 2018, the central government

asked the Reserve Bank of India
to transfer the government a part
of its reserves. The administration
expressed that the assets with RBI
is past the necessary sum, and this
cash can be put to all the more
likely use as instead of keeping
them idle. But,the RBI didn't
favour the proposal. RBI expected
that moving a portion of its
reserves will make it powerless at
the hour of monetary emergency. That brought about the contention between RBI and
Government. To go to a balanced decision, Bimal Jalan's board of trustees was delegated, which
is headed by Bimal Jalan, a previous RBI representative.

RBI’s Reserve

The total reserves with the RBI stands at Rs 9.6 lakh crore, up from Rs 8.38 lakh crore in F17.
The RBI reserves are divided under a few heads. It holds contingency funds worth Rs 2.32 lakh
crore, up from Rs 2.28 lakh crore in FY17. Under money and gold revaluation account, the RBI
holds Rs 6.92 lakh crore, up from 5.3 lakh crore in FY17. Under asset development fund it has
0.23 lakh crore, same as in FY17. Under venture revaluation account, it holds Rs 0.13 lakh crore,
down from Rs 0.57 lakh crore in FY17.

The reserves with the RBI accumulate because of a few components. First is its earnings from
three sources: interest on government securities held for directing open market operations, fee
from government's market borrowing program; and earning from investment in foreign currency
asset. Second source is profit held in the wake of offering dividends to government. Third source
is revaluation of foreign assets and gold.

Economic Capital Framework

The Economic Capital Framework (ECF) is an structural  break from past procedures which to
a great extent included investigation of situations to arrive at the potential risk to the RBI balance
sheet. The RBI has built up an ECF to give a goal, rule-based, straight forward procedure for
deciding the appropriate level of risk provisions to be made under Section 47 of the Reserve
Bank of India Act, 1934. The system was created in 2014–15, and keeping in mind that it was
utilized to advise the risk provisioning and surplus distribution decisions for that year, it was
officially operationalized in 2015–16. The ECF was enhanced by a Staggered Surplus
Distribution Policy (SSDP) in 2016-17 to smoothen the cyclicality in RBI's ecocomic capital and
consolidate a specific level of adaptability in surplus distribution.

Recommendation for changes in ECF by the Bimal Jalan committee

 The panel has prescribed a review of the ECF at regular intervals. In any case, if there
should arise an occurrence of a critical change in the RBI's risks and operating
environment, a moderate audit might be considered.
 It has additionally recommended that an interim dividend to the government should
just be made in exceptional circumstances.
 The board has additionally proposed a more clear differentiation between the two parts of
economic capital specifically (a) realised equity and (b) revaluation balances.
  Realized equity is a type of a contingency fund for meeting all risk or misfortunes
essentially developed from retained profit. It is called the Contingent Risk Buffer (CBR)
 The board has given a range of 5.5-6.5% of RBI's balance sheet for CBR.
Subsequently, the RBI has chosen to set the CBR level at 5.5% of the accounting report.

Transfer of excess funds from RBI to Government

The Reserve Bank of India (RBI) can transfer its surplus profits to the government of India as
per Section 47 of the Reserve Bank of India Act, 1934 which is as per the following:

“After making provision for bad and doubtful debts, depreciation in assets, contributions to staff
and superannuation funds and for all matters for which provision is to be made by or under this
Act or which are usually provided for by bankers, the balance of the profits shall be paid to the
Central Government.”

Government's View on Transfer

The NITI Aayog Vice Chairman stressed that transfer of reserves would not put RBI's balance
sheet at risk. Former Chief Economic Advisor Arvind Subramanian had evaluated RBI could
give Rs 4 lakh crore, however out of that they are just giving Rs 58,000 crore (the surplus
component).

The move is required to help the government  when India is experiencing a time of
economic slowdown, triggered  by more slow consumption demand and more
weaker investment. Further, the move will assist the government  with countering the
setback in revenue and tax collection. Since inflationary weight is low, business analysts
accept that the move won't have a negative effect over the long run.

Issues and Challenges (View points)

 The main issue identified with the most recent move is the way where RBI's board
acknowledged the panel's suggestions and promptly followed up on it. This at that point
starts the trend for future exchanges and risk turning into the accepted template —in
years good and bad.
 The move has very serious implications for the RBI’s balance sheet, Union Budget,
financial markets and debt management by the RBI
 The subsequent issue is the embedded belief among big section of the government
and organization about the idea of RBI's reserves and how it should be deployed.
 The transfer of fund will and has impacted the fiscal deficit target of the government in
the budget 2020 as the government got more amount of money to fund more projects and
also to increase the consumption in the economy.
  a key question which remains unanswered is who should decide if the RBI has sufficient
reserves. "Should the government decide this or should the RBI," He asks.
 However some economist are of the view that the use of excess funds should be of
balance sheet nature and should not be used for expenditure rather it can be positively
used for recapitalization of banks and extinguishing debt to show that the government is
serious about a strong public sector fiscal position.
 The massive payout has raised worries that the government might be appropriating
money from the RBI to meet its dire spending needs, thus effectively viably
transforming the national bank into a financier for the government. National banks,
like the RBI, however, should be free from all types of government influences. But in
reality, governments across the world attempt to impact decision-making by their
respective national banks in different manners.