The Reserve Bank of India board, headed by governor Shaktikanta Das, which met in Mumbai, approved a transfer of £17.60 billion to the government. This includes £12.34 billion of surplus or dividend for the year 2018-19 and £5.26 billion of excess provisions - a one-time transfer which is a first for the RBI.
The transfer of the excess capital has been a bone of contention between RBI and the government since the time Raghuram Rajan was the governor. Differences had come to a head during former governor Urjit Patel’s tenure, with external board members and the former economic affairs secretary pushing for a transfer, which led to Patel’s resignation last December. It was after Das took over in December 2018 that the Jalan panel was constituted.
The transfer is based on a formula recommended by the Bimal Jalan committee’s revised Economic Capital Framework that was adopted by the board. Amid the battle for funds, the panel had been set up to work out the optimum capital level with RBI. The RBI was originally expected to transfer around £6.6 billion to the Centre, including £800 million of “surplus reserves.” This was far lower than the £9 billion that had been budgeted for during the current fiscal year. However, the eventual transfer amounts to over £17.6 billion.
The surplus of £12.3 billion is the largest ever for the RBI. The highest that RBI has transferred so far was £6.58 billion in 2014-15. The RBI has stopped ploughing back surplus into reserves and has been remitting 99% of its gains to the government since 2013-14.
The record earning of £12.3 billion in 2018-19 followed huge dollar intervention by RBI in the first half of 2018-19. RBI also made money by lending money to banks and buying back interest-bearing bonds through open market operations. These operations, done to stabilise financial markets, ended up in RBI’s coffers.
While the transfer is at the higher end of the spectrum based on Jalan’s recommendation, it is way below the £30 billion expected by some in the government. Bank of America Merrill Lynch in an earlier report had pegged RBI’s surplus reserves at $43bn or £30 billion.
The government is, however, seeing it as a victory of sorts as it has managed to extract surplus funds that were lying idle with RBI. The Jalan panel identified RBI’s capital in two parts - realised equity (actual profits) and revaluation balances (where the value of reserves had gone up). The panel had recommended that RBI retain realised equity at between 5.5% and 6.5% of total assets, as against 6.8% at present. The board, however, chose to retain equity at a lower level of 5.5% and transferred £5,26 billion of surplus.