“Based on a limited audit review and after applying the extant economic capital framework, the board decided to transfer an interim surplus of Rs 280 bn to the central government for the half year ended December 31, 2018,” said the Central Bank. This highly anticipated and generous move of the RBI will take the total transfer of funds from the RBI to the government in fiscal 2019 to Rs 68,000 cr, which is substantially higher than the Rs 50,000 cr transferred during the fiscal 2017.

Incidentally, it is the second successive year in which RBI will be transferring an interim surplus to the government as against the usual practice of transferring the profits after the closure of its financial year (July-June) and submission of the Board approved statutory annual report to the government in August.

However, this transfer of an interim dividend per se is not a great event except that it is crucial for the government to meet its revised fiscal deficit target of 3.4% for the fiscal 2019, more so in the light of its lower than expected revenue collection via the Goods and Services Tax (GST) channel, the increased demand for recapitalization from the public sector banks and the increased budgetary allocations under social welfare schemes. Intriguingly, this transfer also sends a clear signal that this time round, the government is not as aggressive in pushing RBI to transfer a huge chunk of reserves as it had been in its argument for the reserves earlier. 

Nevertheless, payment of interim dividend by RBI has become a hotly contested issue in the recent past. For, as the reports go, ever since Arvind Subramanian, the former Chief Economic Adviser to the government argued that the RBI is sitting on a pile of reserves that could be put to more productive use if only they are transferred to the government, the central government had been putting pressure on the RBI to transfer more funds from its contingency reserves to exchequer stating that it is holding more than what most Central Banks across the world hold in relation to their assets. Extending the argument further, the government, saying that the RBI holds about 27% of its assets as capital and reserves as against 13-14% held by most of the Central Banks around the world, indeed suggested for transferring about Rs 500,000 cr to the government .

Evidently, it is a fiscal drive of the government, but it would result in a sea change in the RBI policy framework pertaining to maintenance of reserves and the autonomy that it enjoys in its maintenance. It is in this context that the erstwhile governor of the RBI, Urjit Patel — who argued that the reserves it accumulated over the years through interest income and seigniorage should be left with it as contingency funds to ensure financial stability in the economy — was suspected to have engaged in a bitter face-off with the government that is eager to gain access to RBI’s reserves, and finally resigned, of course, citing personal reasons.

But the fact remains that an economy which is in transition like that of ours is more vulnerable to external financial shocks under which RBI should not stand exposed as though lacking necessary reserves to defend the rupee and hence needs higher reserves vis-à-vis the Central Banks of the western world. It is in order here to recall what the YH Malegam committee of 2013 recommended: each year RBI to transfer 15% of the original cost of fixed assets to the prevailing asset development reserve. As against this, reports indicate that in the previous three financial years ending fiscal 2017, RBI did not transfer any funds to its reserves but transferred the entire profit to the government. Raghuram Rajan, former RBI governor, opined that reduction in the assets of RBI will reduce its ability to absorb government borrowings by buying bonds. It is in this context that many have questioned the recent RBI’s generous payment of interim dividend. The matter is thus complex, calling for rejigging the economic capital framework of RBI urgently.

Let us hope that the panel formed to review the economic capital framework headed by Bimal Jalan, former RBI governor, will come up with a rational document that puts all these controversies to rest by determining the adequate level of reserves by assessing its risk-buffer requirements in a systematic manner and indicating the capital that the Central Bank needs to hold to perform its role of managing macroeconomic stability effectively.