ASSIGNMENT 1 C ISHWARYA DEVI

BC0150007

Whether the surplus of Rs.1,76,000 crores to the Central Government by the

RBI is a Boon to Indian Economy or it affects the Indian Economy?
In November 2018, reserve bank of India in its board meeting decided to form a committee to
review the economic capital framework (ECF) for the Reserve Bank. The committee reorted that
“While central banks are seen to be adopting ES at 99 per cent confidence level (CL), the
Committee has recommended the adoption of a target of ES 99.5 per cent CL keeping in view
the macroeconomic stability requirements,”
As a result Mr.Shaktikanta Das, The Governor of Reserve Bank of India (RBI) on 578th
meeting of the Central Board approved the transfer of record Rs 1.76 lakh crore dividend and
surplus reserves to the government for comprising Rs 1,23,414 crore of surplus for the year
2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital
Framework (ECF) as well as to boost Prime Minister Narendra Modi-led regime's prospect (i.e.)
stimulate the slowing economy without widening fiscal deficit.
Further, Finance Minister Nirmala Sitharaman had last week announced a slew of measures to
prop up growth even as the government tried to stick to the target of keeping fiscal deficit at 3.3
per cent of the GDP. The additional cash will now give the Centre more headroom for
stimulating the economy.
RBI'S SURPLUS TO GOVT WILL IMPACT FISCAL DEFICIT AND BOND
MARKETS :
This Rs 1.76 trillion amount needs to be seen as a sum of 3 numbers which bear different
connotations and has varied impact on the fiscal deficit and bond markets, system liquidity and
the overall issue of RBIs capital, reserves, balance sheet strength and its independence.
IMPACT ON FISCAL DEFICIT AND BOND MARKETS:
The larger than anticipated dividend and the ‘one-time’ excess capital windfall should ease the
fiscal worries to a large extent as well as the revenue growth is running short by almost Rs 1
trillion (Rs 1,00,000 crore). Thus the 52,000 crore payout will help bridge the revenue shortfall
and allow the government the space to still keep the fiscal deficit to the budgeted 3.3 per cent of
GDP.
The Bond markets biggest worry has been on fiscal slippage on weaker revenues and/or the
government announcing a fiscal stimulus package given the narrative of the economic
slowdown. Hence is trading at a steep spread over the current repo rate of 5.4 per cent.

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ASSIGNMENT 1 C ISHWARYA DEVI
BC0150007

IMPACT ON LIQUIDITY AND LENDING RATES:

As the government is over-drawn to about Rs 1 trillion and has already spent that money into the
system, there is no material liquidity impact of the Dividend Payment. The excess capital payout
of Rs 50,000 crores depending on how and when it is paid will add to system liquidity and
increase the ‘Core’ Liquidity to around Rs 1.5 trillion. But the RBI is expected to maintain
surplus liquidity of around 1 per cent of NDTL (Net Demand And Time Liabilities) for some
more months to allow the transmission rate cuts to flow through the banking system onto the
economy.
IMPACT THE RBIS CAPITAL, RESERVES AND INDEPENDENCE:
The Jalan Committee report on the framework to determine the economic capital of the Reserve
Bank of India always kept in mind that India remains an Emerging Market country with its own
macro frailties and a government which runs a fiscal deficit on whom the RBI cannot depend on
capital infusion if things go bad. The RBI thus needs to have its own sufficiently large capital
buffer by laying down the following:
1. Any surplus due to the government can be paid only from retained earnings and not by using
the notional revaluation reserves.
2. The contingent capital buffer has to remain at all times in a band of 5.5 per cent - 6.5 per cent
of the RBI’s total balance sheet
3. The total economic capital of the RBI needs to be in the range of 20 per cent - 24.5 per cent of
the RBI’s total balance sheet

Thus, the 52,637 crore has emanated from as the Board of the RBI decided to keep the
contingency capital at the lower band of 5.5 per cent and hence paid out the excess to the
government. This also means that for it to pay it again, the contingency capital would have to
rise above towards the 6.5 per cent level for a fresh surplus to be transferred. This is why we
believe this capital transfer to be a ‘one-time’ in nature.

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