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RBI’s trading gains to decide profit transfers to government

There is no guarantee, however, that Reserve Bank of India’s (RBI) surplus will always increase.

, ET Bureau|
Aug 28, 2019, 07.56 AM IST
Mumbai: With the Bimal Jalan committee now fixing a range for the central bank’s risk provisioning kitty, Mint Road’s trading gains from buying and selling bonds and foreign exchange will henceforth determine how much North Block would receive as annual payouts from RBI.

There is no guarantee, however, that Reserve Bank of India’s (RBI) surplus will always increase. If the RBI’s balance sheet continues to expand rather quickly, the amount it keeps as contingent risk buffer (CRB) will also climb, and that could decrease the payout.

The Bimal Jalan committee has recommended risk provisioning be made primarily from the RBI’s retained earnings, also referred to as CRB. It has said the buffer be maintained in the 5.5 per cent to 6.5 per cent range of the RBI’s balance sheet. For 2018-19, the RBI’s central board decided to maintain equity at the lower end of this spectrum, i.e. at 5.5 per cent, which freed up an extra Rs 52,600 crore to be transferred to the government.

“The main takeaway is we now have a floor for risk provisioning, which is clearly defined. However, how much the RBI manages to retain depends on many moving parts, including market conditions and liquidity management part of the monetary policy framework,” said Gaurav Kapur, chief economist at IndusInd Bank. “Our calculations suggest that if the RBI balance sheet grows by 7.7 per cent, which is its nineyear CAGR, next year it will have to transfer aroundRs 17,000 crore to realised equity first from its net income before arriving at a transferable surplus.”

Economists expect the bonus transfer from the RBI to be used by the government to bridge its fiscal gap and also possibly capitalise public-sector banks, boosting credit growth. This bonus comes even as tax collections remain lower than the target and slower economic growth has muted expectations of a recovery in collections. “The tax revenue assumptions in the FY20 budget were fairly optimistic. This would have meant that the government would have to cut expenditure drastically toward the end of the year to meet the 3.3 per cent of GDP fiscal deficit target,” HSBC said in a note. “The RBI dividend bounty is likely to give some much needed breather in the fiscal math. And if expenditure does not have to be slashed drastically to meet the fiscal deficit target, it is also likely to be marginally positive for growth.”

HSBC expects India’s GDP growth to improve to 6.9 per cent in the second half of FY20 from 5.8 per cent in the first half.

Bank of America-Merrill Lynch economist Indranil Sen Gupta said the money may be used to recapitalize public sector banks, helping reduce lending rates and boosting growth.

“The ministry of finance will infuse capital into PSU banks with excess RBI capital. PSU banks, in turn, will park it in a government account with the RBI. And Rs 1 lakh crore of excess RBI capital will allow 12 per cent PSU bank (ex-SBI) loan growth until 2024,” Sen Gupta said.

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