It is cited as one of the major reasons for former RBI Governor Urijit Patel’s exit. And the debate on the government’s planned utilisation of excess RBI reserves continues.
The consensus view is that with the entry of new RBI Governor Shaktikanta Das, the government would be able to encash on RBI’s reserves to recapitalise banks to boost the economy and generate employment. According to estimates by the finance ministry, the RBI has around Rs 3.6 trillion of excess capital that can be used.
This is an urgent need for the government as it enters election year, and a possibly more ‘pliant’ central bank governor could be just what the doctor ordered. The government plans to pump in Rs 420 billion of liquidity to recapitalise banks this month. It also has to cater to expenses for its health care programme and purchase crops from farmers at the minimum guaranteed prices. To further compound its problems, the fiscal deficit has reached 104% of the budget estimate. The revenue side has also missed targets wrt tax collections and asset sales.
A research paper by four economists (one of them being former Chief Economic Adviser Mr Arvind Subramanian) argue that the RBI has at least Rs 5.3 trillion of excess capital that needs to move beyond the vaults. On all counts, the RBI is too conservative according to the paper. The ratio of RBI’s capital as a proportion of its assets is 27.7%, three times higher than the global median ratio of 8.4%. Similarly on the ratio of retained earnings and contingency reserves, India stands at 8.2% compared to the global median of 2%. This is ten times more than the planned budgetary expenditure for Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) in 2018. RBI has often argued that it requires more reserves due to India’s current account deficit and absence of a reserve currency like the dollar or euro.
So the reserves must be utilised, but economists fear that they may be leveraged for electoral sops. Former RBI Governor Raghuram Rajan has warned that dipping into RBI’s reserves could affect its credit rating and make borrowing more expensive. He comments, “We are ‘Baa’ country. We are barely investment grade. Sometime, we need to undertake international transactions which require really high credit rating… So, for that we need an unimpeachable balance sheet.” Finance Minister
commented at a media event, “I do not want a single rupee [from the RBI’s surplus] for my fiscal [deficit goals], or for this year’s expenses or for till the month of May…” He has sought to clarify that part of the RBI’s reserves could recapitalise banks and “be used for the poor of the country”.