Bimal Jalan Committee on RBI’s reserves

Mains Paper 3 : Indian Economy |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Bimal Jalan Committee on RBI’s reserves

Mains level : RBI reserves and govt. claim over it


News

  • The Bimal Jalan Committee on treatment of Reserve Bank of India’s reserves is likely to recommend a transfer of a specified quantum of RBI reserves to the government.

Bimal Jalan Committee and its Terms of Reference

  • The committee was to keep in mind the statutory mandate under the RBI Act that the profits of the RBI be transferred to the government after it made provisions ‘which are usually provided by the bankers’.
  • Against this background, the committee was tasked with reviewing the status, need, and justification of the various provisions, reserves and buffers currently provided for by the RBI.
  • It was also tasked to review the global best practices followed by central banks in making provisions for the risks that central bank balance sheets are subject to.
  • The committee was also tasked with suggesting an “adequate level” of risk provisioning that the RBI should maintain, and determining whether the RBI’s current reserves were surplus of this or lower.
  • If they are surplus, then the committee also had to come up with a suitable profits distribution policy.

Quick recap: Issue over transfer of RBI surplus

  • The government and the RBI have been at loggerheads over the issue of how much of the central bank’s reserves can be transferred to the Centre.
  • The government view has been that the RBI’s reserves constitute 27% of its total assets, a much higher proportion than the global norm of 14%.
  • As a means to reach a resolution on the issue, the central bank, in December, constituted a committee under former RBI Governor Bimal Jalan.

Why govt. needs RBI money?

  • The treatment of the RBI’s reserves is a matter of great importance at a time when the central government has committed to a fiscal deficit target of 3.3% in financial year 2019-20, and a further tightening to 3% the next year.
  • With tax revenues falling short of expectations, any off-Budget receipts from the RBI will be welcomed by the Centre.

What are the key contentious issues?

  • First and foremost is the issue of transferring past reserves including unrealized gains in gold and currency revaluation accounts.
  • Most committee members favoured a reduction in the RBI’s excess reserves in a phased manner over 3 to 5 years, without any substantial additional annual transfer to the government.
  • It is not immediately clear how much excess capital has the committee identified that can be shared with the government.
  • The other big issue pertains to RBI’s profits.

What next?

  • Many economists and expert committees have in the past argued that the RBI is holding much higher capital that required to cover all its risks and contingencies.
  • Former CEA Arvind Subramanian said in Economic Survey 2016-17 that the RBI is already exceptionally highly capitalized.
  • The recommendations will be submitted to the central bank “very soon”.
  • The report is also expected to reflect the differences among the panel members over the treatment of RBI’s excess reserves.
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