Challenge to the reserve of the Reserve Bank of India

The Reserve Bank of India (RBI) and the Center disagree on many issues, but the most important concerns the treatment of large reserves in the central bank's balance sheet.

If Reserves Are Overwhelmed Watering for the Center, it's a source of security for the RBI and not for trading.

The Views of the Center

Let us first examine the problem from the angle of the Center. Expenditures for the recapitalization of banks continue to grow. After coughing more than 2.11 million crores of rupees in the past year, the government finds itself in the unenviable position of having to spit even more, as the skeletons keep falling into ruin.

Second, the Center is still struggling to recover all the canceled notes as part of the demonetization exercise. Remember that he was betting on a lot of the non-returning tickets that would have been accumulated on his account.

Third, take into account the fact that it is an election year where he would like to increase spending to create a sense of well-being. factor with the voters, and the table is complete. Now, you know why the government is salivating at the booty of the RBI coffers.

How RBI sees it

Let's see this now from the perspective of the central bank. As of June 30, 2018, the RBI had reserves amounting to 10.46 million kroner, mainly under two heads: revaluation reserve in foreign exchange and gold (6.91 million kroons) and contingency reserve ( 2.32 billion crowns).

The currency and the gold revaluation reserve (CGRA) represents 19.11% of the total badets and the contingency reserve of 6.41%. In 2004, a committee led by Usha Thorat, then Deputy Governor, had examined the question of what the ideal size of RBI's reserves should be.

According to her, the CGRS should represent 12.26% of total badets, while the contingency reserve should be 5.5. %, for a total of 17.76%. But the RBI board did not accept the recommendation and preferred to maintain the level set by a previous committee in 1997. This committee, under V. Subrahmanyam, had set a contingency reserve level of 12% of the total. actives. The reserves consist of transfers from the annual surpluses of RBI's income statement. Surplus after the sale of reserves is paid to the Center in the form of a dividend

In 2013-2014, the governor, Raghuram Rajan, then decided to transfer to the Center the entire surplus of the profit and loss account of the RBI without badigning it to reservations. He acted on the recommendation of another committee headed by Y.H. Malegam stated that the existing reserves exceeded the necessary reserve and that no transfer of profits was necessary.

What were the reserves then? CGRA accounted for 21.81% of total badets and the contingency reserve, 8.44%. The corresponding figures now (2017-18) are respectively 19.11% and 6.41%. By imputation, one can thus conclude that the buffer is now insufficient, according to the recommendation of the Malegam Committee.

Aim of the constitution of reserves

But what is the purpose of these reservations? They are quadruple. The CGRA is supposed to cover a situation in which the rupee appreciates against one or more of the currencies in the basket – and the basket includes several currencies ranging from the dollar to the euro and the yen – or in case of decline in the value of the gold rupee.

The CGRA level now covers about a quarter of the RBI's total foreign exchange reserves.

The Contingency Reserve is intended to cover the depreciation of the value of the RBI State Bond holdings – domestic and foreign – if yields rise and their prices fall. The reserve is also intended to cover the expenses of extraordinary events such as demonetisation (one could argue that, like the tsunami, an exercise similar to demonetization strikes the country once over several generations), money market operations and the cost of printing currencies in a year of insufficient revenue. Most important of all, the contingency fund supports the mother of all guarantees – the role of the central bank as a lender of last resort. The reserve is also a hedge for the Deposit Guarantee Fund, since the Deposit Insurance Corporation and the Credit Guarantee Corporation (CGCG) are a wholly-owned subsidiary of the RBI.

The position of the RBI is therefore that it would be unwise to consider sharing any part of the reserve with the Center. The Center believes that the technocrats of the RBI are too conservative and that the money belongs to them.

Reserves consist of higher seignorage revenues (difference between the value of the new notes printed by the RBI and the costs of printing and distribution) and interest paid by the Center to the central bank on holdings in government securities held by it.

A committee is admissible

So, what is the solution to this problem? Simple. If in doubt, set up a committee.

Such a committee should include representatives of the government, the central bank, academics and the market. The committee should review all aspects of the RBI's balance sheet, suggest a margin of safety on reserves, and define a fair method of sharing reserves, where appropriate.

In his book Advice & Dissent – My Life in the Public Service Former Governor YV Reddy tells the story of the Subramanyam Committee and its recommendation. When he approached the question with the finance secretary of the time, Montek Singh Ahluwalia, he asked him a question: "If you held the post of Minister of Finance in the same position, you would Do you agree with this proposal? "When Dr. Reddy nodded, gave him the green light immediately.

Dr. Reddy cites this to show mutual trust and the level of respect that both had for each other.

Of course, the current scenario is far from it. But is it too much to expect mature individuals to respect each other as professionals and act in the best interest of the nation by abandoning their ego?