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ET View: Jalan Panel does a fine balancing job

Essentially, the committee has decided to keep the RBI’s revaluation reserves out of funds that can be used for transfer to any other account.

ET Bureau|
Updated: Aug 26, 2019, 10.38 PM IST
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BCCL
Bimal-Jalan-bccl
Bimal Jalan, former Reserve Bank of India Governor
The Jalan panel on reworking the Reserve Bank of India’s Economic Capital Framework has done a decent job, disappointing both kinds of extremists, those who had wanted to leave the RBI’s accounts completely intact and those who had hoped to transfer nearly Rs 5 lakh crore of so-called excess reserves to the government’s kitty, and giving the government Rs 58,051 crore in the current financial year over and above the Rs 90,000 crore it has already budgeted.

Essentially, the committee has decided to keep the RBI’s revaluation reserves out of funds that can be used for transfer to any other account. This addresses the concern voiced by many opponents of changing the RBI’s capital framework. Realised equity, derived from the RBI’s earnings, can be used to augment the other component of economic capital, the revaluation balances, but any surplus in the revaluation balances over and above what is required to meet current market risk will stay in that account and cannot be transferred to any other account. The committee has estimated how much of different kinds of provisioning and buffers the RBI requires, as range of proportions of assets. Earnings can be transferred to the government without using them to augment realized equity, if both realized equity and economic capital are within the range set for them. It is this logic that has yielded additional funds for the government.

What should the government do with the additional spending power it has acquired? It should recapitalize the banks, and the banks would leverage the additional capital to lend substantial amounts to revive growth.

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