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  1. Centre wants to tap central bank surplus to cover outgo

Centre wants to tap central bank surplus to cover outgo

Given the likely additional expenditure of R50,000-70,000 crore on salaries and pensions in FY17, the finance ministry wants the Reserve Bank of India...

By: | New Delhi | Published: September 24, 2015 12:40 AM
RBI interest rate

In August, the central bank had transferred an all-time-high amount of Rs 65,896 crore, almost the entire surplus generated in 2014-15, to the exchequer. (Express Photo)

Given the likely additional expenditure of R50,000-70,000 crore on salaries and pensions in FY17, the finance ministry wants the Reserve Bank of India to transfer a record Rs 1 lakh crore from its surplus to the central exchequer.

This would require the RBI to dip into its accumulated internal reserves for the first time, besides shifting the entire surplus income in the current accounting year (July-June) to the Centre.

In August, the central bank had transferred an all-time-high amount of Rs 65,896 crore, almost the entire surplus generated in 2014-15, to the exchequer. In the previous year too, it had transferred the entire surplus (Rs 52,679 crore), against Rs 33,010 crore or 53% of the surplus transferred in the year earlier, owing to pressure from the government.

According to finance ministry sources, the RBI has over the years bolstered its internal reserves — these stood at a whopping Rs 2.43 lakh crore at the end of June 2015 — and is in a position to give additional support to the government, which needs to stick to its fiscal consolidation road map. The sources said the RBI has been told of this eventuality during recent discussions, but the central bank has shown reluctance to dip into its internal reserves, citing the risks involved. For instance, there could be losses if the rupee appreciates (the RBI books profits in its foreign currency assets when the rupee falls). Also, if any bank goes bankrupt, the central bank may have to absorb the liabilities, the RBI noted, although government sources say that any such problems faced by public sector banks would ultimately need to be tackled by the government.

“The wider the area of responsibilities of a central bank, greater the risks and, hence, higher the requirement of capital. A central bank may require recapitalisation precisely at a time when the fiscal position is under strain, say, due to a financial crisis. This strengthens the case for ex ante capitalisation of a central bank, rather than ex post recapitalisation,” the RBI said in its latest annual report. The RBI also feels that dependence on the government for capital could undermine its autonomy.

The Centre, however, wants the RBI to be more sensitive to its fiscal problems. In FY17, the award of the Seventh Pay Commission and the one rank, one pension policy for the armed forces could inflate the Centre’s salaries and pensions bill by around Rs 70,000 crore (the OROP implementation alone could need some Rs 12,000 crore).

Although subdued global commodities prices have helped reduce the subsidy bill, given that private investments have yet to manifestly pick up, the government needs to spend more to spur growth. Though this year’s fiscal deficit target of 3.9% of GDP appears achievable, it is going to be tough for the Centre to trim the deficit to 3.5% of GDP next year and further to 3% of GDP in FY18 as envisioned in the latest fiscal consolidation road map.

The RBI, being the bankers’ bank and the government’s bank, has multiple sources of income like the interest income from repo operations and the coupon payments being received for holding government securities. After administrative and operational expenses, which make only a small fraction of its income, a substantial part of the surplus is transferred to the government and the balance goes to the internal reserves.

Of the Rs 2.43 lakh crore internal reserves accumulated as on June 30, the Contingency Fund held Rs 2,21 lakh crore and the balance was the Asset Development Fund. Besides, the RBI balance sheet for 2014-15 also showed Rs 5.59 lakh crore in unrealised gains due to periodic revaluation of gold and foreign currency assets booked in the currency and gold revaluation account.

The RBI’s paid-up capital is Rs 5 crore as per Section 4 of the RBI Act, 1934. But unlike developed country central banks like the US Federal Reserve that are mandated to transfer most of their profits to the government, RBI Act stipulates that after making provisions for contingencies and corpus funds, the balance profit of the central bank is to be transferred to the government.

Reverse order:

* RBI transferred 99.99% of its surplus to the Centre in the last two years, quite higher than in previous years
* Finance ministry wants RBI to dip into its reserves—of about Rs 2.43 lakh crore—to transfer an even higher amount in FY17
* The central bank reluctant to drain its reserves; says it needs the comfort of higher capital to address risks and other eventualities

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  1. Anjan Barua
    Sep 24, 2015 at 6:27 am
    A BASEL III for banks and BASEL I for the Central Bank .?
    Reply
    1. Dr.T.V.Gopalakrishnan Krishnan
      Sep 26, 2015 at 8:32 pm
      Let the Cetral government release the pension relief to RBI retirees first. The bureaucrachy has withheld the pension updation for no valid reason neither financial nor legal nor any technical issue. The EGO of some bureaucarts has come in the way. It is pending for more than a decade and the retirees are suffering without having a decent pension. They cannot call thmselves as Retirees of The Central Bank of the Country. Their pensions are not adequate to meet the present day cost of living particularly medical and other living expenditures.
      Reply
      1. M Govinda
        Sep 29, 2015 at 6:31 pm
        Considering the size of RBI’s balance sheet, and remembering that the Bank’s share capital (5 crore as against US$ 100 billion proposed and accepted for the new BRICS Development Bank- I am not making a comparison, but highlighting the need for a higher capital for RBI)) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total ets which was accepted by the Bank decades ago. M G Warrier, Mumbai
        Reply
        1. M Govinda
          Sep 29, 2015 at 6:33 pm
          To ensure that temptations of government emanating from external compulsions do not dilute the strength of RBI’s balance sheet, GOI should take measures to augment the share capital of RBI after carrying out appropriate amendments to RBI Act. Till such time RBI should be allowed to retain surplus income by transfer to reserves. Considering the size of its balance sheet and the internal and external pressures on its income generating capabilities, as also the nature of shocks the Bank has to absorb from time to time, the central bank’s reserves need to be augmented on an ongoing basis. M G Warrier, Mumbai
          Reply
          1. M Govinda
            Sep 24, 2015 at 1:43 pm
            Long back, RBI had taken a conscious decision to augment its reserves (Contingency Reserves ets Development Reserves) to a level of 12 per cent of the Bank’s balance sheet total. The Bank almost managed to almost touch this level in 2009. The following table indicates the progressive deterioration in the reserves position, since then: Balances in Contingency Fund (CF) and et Development Fund (ADF)(Crore) June 30 CF ADF CF ADF As%to total ets 2009 153392 14082 167474 11.9 2010 158561 14632 173192 11.3 2011 170728 15866 186594 10.3 2012 195405 18214 213619 9.7 2013 221652 20761 242413 10.1 2014 221652 20761 242413 9.2 2015 221614 21761 243375 8.4 Source: RBI Annual Reports To meet the internal capital expenditure and make investments in its subsidiaries and ociate insutions, the Reserve Bank had created a separate ADR in 1997-98 with the aim of reaching one per cent of the Reserve Bank’s total ets within the overall indicative target of 12 per cent of the total ets set for CF and ADF taken together, accepted by the Bank earlier. Obviously, the practice of transferring the entire ‘surplus income’ to government when the reserves position of the central bank shows a continuous declining trend(as a percentage of total ets) in the context of the present growth rate of Bank’s et size, needs a review. Considering the size of RBI’s balance sheet, and remembering that the Bank’s share capital (5 crore) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total ets which was accepted by the Bank decades ago. To ensure that temptations of government emanating from external compulsions do not dilute the strength of RBI’s balance sheet, GOI should take measures to augment the share capital of RBI after carrying out appropriate amendments to RBI Act. Till such time RBI should be allowed to retain surplus income by transfer to reserves. Considering the size of its balance sheet and the internal and external pressures on its income generating capabilities, as also the nature of shocks the Bank has to absorb from time to time, the central bank’s reserves need to be augmented on an ongoing basis. M G Warrier, Mumbai
            Reply
            1. M Govinda
              Sep 26, 2015 at 9:25 pm
              To meet the internal capital expenditure and make investments in its subsidiaries and ociate insutions, the Reserve Bank had created a separate ADR in 1997-98 with the aim of reaching one per cent of the Reserve Bank’s total ets within the overall indicative target of 12 per cent of the total ets set for CF and ADF taken together, accepted by the Bank much earlier. The Bank almost managed to touch this level in 2009. Since then, the fall in reserves was continuous, with the exception of one year (2012-13) when there was a rise in position from 9.7 per cent in the previous year to 10.1 per cent, till 2014-15 which year the percentage has come down to a low of 8.4 per cent. Obviously, the practice of transferring the entire ‘surplus income’ to government when the reserves position of the central bank shows a continuous declining trend(as a percentage of total ets) in the context of the present growth rate of Bank’s et size, needs a review. Considering the size of RBI’s balance sheet, and remembering that the Bank’s share capital(5 crore) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total ets which was accepted by the Bank decades ago. To ensure that temptations of government emanating from external compulsions do not dilute the strength of RBI’s balance sheet, GOI should take measures to augment the share capital of RBI after carrying out appropriate amendments to RBI Act. Till such time RBI should be allowed to retain surplus income by transfer to reserves. Considering the size of its balance sheet and the internal and external pressures on its income generating capabilities, as also the nature of shocks the Bank has to absorb from time to time, the central bank’s reserves need to be augmented on an ongoing basis. M G Warrier, Mumbai
              Reply
              1. M Govinda
                Sep 26, 2015 at 9:35 pm
                To meet the internal capital expenditure and make investments in its subsidiaries and ociate insutions, the Reserve Bank had created a separate ADR in 1997-98 with the aim of reaching one per cent of the Reserve Bank’s total ets within the overall indicative target of 12 per cent of the total ets set for CF and ADF taken together, accepted by the Bank much earlier. The Bank almost managed to touch this level in 2009. Since then, the fall in reserves was continuous, with the exception of one year (2012-13) when there was a rise in position from 9.7 per cent in the previous year to 10.1 per cent, till 2014-15 which year the percentage has come down to a low of 8.4 per cent. Obviously, the practice of transferring the entire ‘surplus income’ to government when the reserves position of the central bank shows a continuous declining trend(as a percentage of total ets) in the context of the present growth rate of Bank’s et size, needs a review. Considering the size of RBI’s balance sheet, and remembering that the Bank’s share capital(5 crore) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total ets which was accepted by the Bank decades ago. To ensure that temptations of government emanating from external compulsions do not dilute the strength of RBI’s balance sheet, GOI should take measures to augment the share capital of RBI after carrying out appropriate amendments to RBI Act. Till such time RBI should be allowed to retain surplus income by transfer to reserves. Considering the size of its balance sheet and the internal and external pressures on its income generating capabilities, as also the nature of shocks the Bank has to absorb from time to time, the central bank’s reserves need to be augmented on an ongoing basis. M G Warrier, Mumbai
                Reply
                1. M Govinda
                  Sep 28, 2015 at 5:54 am
                  To meet the internal capital expenditure and make investments in its subsidiaries and ociate insutions, the Reserve Bank had created a separate ADR in 1997-98 with the aim of reaching one per cent of the Reserve Bank’s total ets within the overall indicative target of 12 per cent of the total ets set for CF and ADF taken together, accepted by the Bank much earlier. The Bank almost managed to touch this level in 2009. Since then, the fall in reserves was continuous, with the exception of one year (2012-13) when there was a rise in position from 9.7 per cent in the previous year to 10.1 per cent, till 2014-15 which year the percentage has come down to a low of 8.4 per cent. Obviously, the practice of transferring the entire ‘surplus income’ to government when the reserves position of the central bank shows a continuous declining trend(as a percentage of total ets) in the context of the present growth rate of Bank’s et size, needs a review. Considering the size of RBI’s balance sheet, and remembering that the Bank’s share capital(5 crore) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total ets which was accepted by the Bank decades ago. To ensure that temptations of government emanating from external compulsions do not dilute the strength of RBI’s balance sheet, GOI should take measures to augment the share capital of RBI after carrying out appropriate amendments to RBI Act. Till such time RBI should be allowed to retain surplus income by transfer to reserves. Considering the size of its balance sheet and the internal and external pressures on its income generating capabilities, as also the nature of shocks the Bank has to absorb from time to time, the central bank’s reserves need to be augmented on an ongoing basis. M G Warrier, Mumbai
                  Reply
                  1. M Govinda
                    Sep 24, 2015 at 12:45 pm
                    Long back, RBI had taken a conscious decision to augment its reserves (Contingency Reserves ets Development Reserves) to a level of 12 per cent of the Bank’s balance sheet total. The Bank almost managed to almost touch this level in 2009. The following table indicates the progressive deterioration in the reserves position, since then: Balances in Contingency Fund (CF) and et Development Fund (ADF)(Crore) June 30 CF ADF CF ADF As%to total ets 2009 153392 14082 167474 11.9 2010 158561 14632 173192 11.3 2011 170728 15866 186594 10.3 2012 195405 18214 213619 9.7 2013 221652 20761 242413 10.1 2014 221652 20761 242413 9.2 2015 221614 21761 243375 8.4 Source: RBI Annual Reports To meet the internal capital expenditure and make investments in its subsidiaries and ociate insutions, the Reserve Bank had created a separate ADR in 1997-98 with the aim of reaching one per cent of the Reserve Bank’s total ets within the overall indicative target of 12 per cent of the total ets set for CF and ADF taken together, accepted by the Bank earlier. Obviously, the practice of transferring the entire ‘surplus income’ to government when the reserves position of the central bank shows a continuous declining trend(as a percentage of total ets) in the context of the present growth rate of Bank’s et size, needs a review. Considering the size of RBI’s balance sheet, and remembering that the Bank’s share capital(5 crore) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total ets which was accepted by the Bank decades ago. To ensure that temptations of government emanating from external compulsions do not dilute the strength of RBI’s balance sheet, GOI should take measures to augment the share capital of RBI after carrying out appropriate amendments to RBI Act. Till such time RBI should be allowed to retain surplus income by transfer to reserves. Considering the size of its balance sheet and the internal and external pressures on its income generating capabilities, as also the nature of shocks the Bank has to absorb from time to time, the central bank’s reserves need to be augmented on an ongoing basis. M G Warrier, Mumbai
                    Reply
                    1. M Govinda
                      Sep 25, 2015 at 10:40 am
                      Long back, RBI had taken a conscious decision to augment its reserves (Contingency Reserves ets Development Reserves) to a level of 12 per cent of the Bank’s balance sheet total. The Bank almost managed to almost touch this level in 2009. The following table indicates the progressive deterioration in the reserves position, since then: Balances in Contingency Fund (CF) and et Development Fund (ADF)(Crore) June 30 CF ADF CF ADF As%to total ets 2009 153392 14082 167474 11.9 2010 158561 14632 173192 11.3 2011 170728 15866 186594 10.3 2012 195405 18214 213619 9.7 2013 221652 20761 242413 10.1 2014 221652 20761 242413 9.2 2015 221614 21761 243375 8.4 Source: RBI Annual Reports To meet the internal capital expenditure and make investments in its subsidiaries and ociate insutions, the Reserve Bank had created a separate ADR in 1997-98 with the aim of reaching one per cent of the Reserve Bank’s total ets within the overall indicative target of 12 per cent of the total ets set for CF and ADF taken together, accepted by the Bank earlier. Obviously, the practice of transferring the entire ‘surplus income’ to government when the reserves position of the central bank shows a continuous declining trend(as a percentage of total ets) in the context of the present growth rate of Bank’s et size, needs a review. Considering the size of RBI’s balance sheet, and remembering that the Bank’s share capital(5 crore) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total ets which was accepted by the Bank decades ago. To ensure that temptations of government emanating from external compulsions do not dilute the strength of RBI’s balance sheet, GOI should take measures to augment the share capital of RBI after carrying out appropriate amendments to RBI Act. Till such time RBI should be allowed to retain surplus income by transfer to reserves. Considering the size of its balance sheet and the internal and external pressures on its income generating capabilities, as also the nature of shocks the Bank has to absorb from time to time, the central bank’s reserves need to be augmented on an ongoing basis. M G Warrier, Mumbai
                      Reply
                      1. M Govinda
                        Sep 28, 2015 at 2:30 pm
                        With the transfer of entire surplus income for 2014-15 to GOI, the central bank’s reserves have come down to 8.4 per cent of ets against a target of 12 per cent aimed by the bank long back, which was almost achieved by 2009(11.9 percent). m RBI. Even from a purely political angle also, it is advisable to have a strong central bank, with a 'stronger balance sheet'. Considering the size of RBI’s balance sheet, and remembering that the Bank’s share capital (5 crore as against US$ 100 billion proposed and accepted for the new BRICS Development Bank- I am not making a comparison, but highlighting the need for a higher capital for RBI)) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total ets which was accepted by the Bank decades ago. M G Warrier, Mumbai
                        Reply
                        1. H
                          hariram
                          Sep 28, 2015 at 12:15 pm
                          There is a limit to central governments greedstead of tapping the huge cache of Kaala dhan of the money launderers,it is trying to loot the reserves of the monetary authority...which is generally used for meeting acute financial emergency.The entire board of RBI should resign but never agree to Idi Amin type foolish proposals
                          Reply
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