RBI transfers Rs 1.76 lakh crores to the Government

On August 26, 2019, the Central Board of Reserve Bank of India decided to transfer a record high surplus reserve of Rs.1,76,051 cr. to the Government of India. It is higher than the aggregate dividend paid out by the Central Bank in Previous fiscal years something that the government had been seeking desperately. Comprising of Rs.1,23,414 cr. of surplus for year 2018-19 and Rs.52,637 crore of excess provisions which has been transferred to the government as per the revised economic capital framework suggested by the expert panel indicated that the RBI currently has more capital than what it needs as a contingency. Out Of the Rs.1,23,414 crore, the RBI has already transferred Rs.28,000 crore to the government in the previous fiscal as interim dividend, which will reflect in RBI's upcoming annual report. The net liquidity injection from the RBI as a result of this exercise will amount to Rs.1,48,051 crore against Rs.90,000 crore estimation provided in Finance Minister Sitharaman's Budget for 2019-20. Before the RBI's announcement, the government had budgeted Rs.90,000 crore as surplus and dividend transfers from RBI for the current fiscal. However, to their surprise it will now get Rs 86,000 crore more than the budgeted amount. It’s like hitting a Jackpot !

Now this Rs.86,000 crore will act as a cushion against the  possible shortfall in revenue collection in financial year 2020. This surplus transfer will proved to be a "lifeline" for the government for higher PSU capex, which is required to meet high growth rate amid a period of sluggish consumer demand and weak investments. Consequently, given the inclination of the government towards fiscal consolidation, the additional funds are likely to be utilized to cover the possible shortfall in receipts, and meet the fiscal deficit target of 3.3 per cent of the GDP for the current fiscal, J M Financial Institutional Securities said in a report. It is approximately three times more than what RBI governor Shaktikanta Das's predecessors ever managed. 

So, to transfer of excess reserves, the central bank, in consultation with the government, had constituted a committee chaired by former RBI governor Bimal Jalan to review the extant economic capital framework of the RBI. The committee had recommended a new surplus distribution policy, which looks at the level of Realized Equity to be maintained by the RBI within the overall level of its economic capital, which is a combination of realized equity and revaluation reserves.  RBI's realized equity--a form of contingency Fund built up from its retained earnings--stood at 6.8 percent of the central bank's balance sheet, but the expert panel led by Bimal Jalan recommended Contingency Fund for meeting all risks/losses to be in the range of 6.5-5.5 percent.

Taking these recommendations into account, the central bank has opted for the lower bound of the realized equity level at 5.5 per cent of the balance sheet and transferred remaining excess reserves worth Rs.52,637 crore to the government.  “As financial resilience was within the desired range, the entire net income of Rs.1,23,414 crore for the year 2018-19, of which an amount of Rs.28,000 crore has already been paid as interim dividend, will be transferred to the Government of India. This is in addition to the Rs.52,637 crore of excess risk provisions, which have been written back and consequently will be transferred to the government," said the statement.

 While the central bank's move is a big gain for the government but the government will have a tough time justifying the transfer of such a big amount into its Piggy.  All the eyes will be on how the government will use this amount amid the economic slowdown. A handful of options available to stabilize dwindling economic growth like the government may use it to reduce the balance sheet or to trim off balance sheet borrowings, help fund Rs.3.38 lakh crore 2019-20 capex target plan, capitalize banks and provide fiscal stimulus to a sagging economy which is in the grip of slowdown or meet the expected shortfall in revenue collections. While the finance ministry has so far not disclosed as how they going to use the surplus amount  RBI says it can be utilized for capital formation by investing in infrastructure building or enhancing the lending capacity of banks by recapitalizing them so that they get enough headroom for expanding credit.  Projects which are stalled for want of small funds could get a boost if the government uses this money. The large amount of reserve that has been transferred could be the cushion that the government can use to shield the economy from further erosion. The Surplus transfer from RBI may help to meet the fiscal deficit target and offset the expected shortfalls in various tax revenues and GST collections in 2019-20.