Significance of the Jalan committee report

A committee set up to recommend the appropriate economic capital framework for the Reserve Bank of India (RBI) has recommended the transfer of excess capital from the central bank to the government over 3 to 5 years. It has also recommended the framework should be reviewed periodically.

The report of the committee, headed by former RBI Governor Bimal Jalan will be submitted to the central bank very soon. The report is also expected to reflect the differences among the panel members over the treatment of RBI’s excess reserves.

What is the committee’s mandate?

The Committee was set up in December last year following discussions between the finance ministry and the RBI about the manner in which the central banks’ surplus can be shared with the government. It was expected to submit its report within 90 days of its first meeting; in other words, by April.

While the committee is chaired by Jalan, former RBI Deputy Governor Rakesh Mohan, who is against transferring a higher surplus to the government, is the Vice Chairman of the committee. RBI Deputy Governor NS Vishwanathan and RBI Central Board Members Bharat Doshi and Sudhir Mankad are the other members of the panel.

What are the key contentious issues?

First and foremost is the issue of transferring past reserves including unrealised gains in gold and currency revaluation accounts. Most committee members favoured a reduction in the RBI’s excess reserves in a phased manner over 3 to 5 years, without any substantial additional annual transfer to the government. It is not immediately clear how much excess capital has the committee identified that can be shared with the government. It is learnt that there are differences between government nominee member on the committee — Finance Secretary Subhash Chandra Garg — and other panel members.

The other big issue pertains to RBI’s profits. The committee was set up to “review status, need and justification of various provisions, reserves and buffers presently provided for by the RBI; and (to) review global best practices followed by the central banks in making assessment and provisions for risks which central bank balance sheets are subject to.

What is at stake?

Prior to setting up of the committee, the finance ministry in its discussions with the RBI, had argued that the existing economic capital framework, which governs the RBI’s capital requirements and terms for the transfer of its reserves to the government, is based on a very “conservative” assessment of risk by the central bank. The ministry has internally estimated RBI’s excess reserves at Rs 3.6 lakh crore.

According to Section 47 of the RBI Act, profits of the RBI are to be transferred to the government, after making various contingency provisions, public policy mandate of the RBI, including financial stability considerations. For the year ending June 2018, RBI had total reserves of Rs 9.59 lakh crore, comprising mainly currency and gold revaluation account (Rs 6.91 lakh crore) and contingency fund (Rs 2.32 lakh crore).

Many economists and expert committees have in the past argued that the RBI is holding much higher capital that required to cover all its risks and contingencies. Former Chief Economic Adviser Arvind Subramanian said in Economic Survey 2016-17 that the RBI is “is already exceptionally highly capitalized” and nearly Rs 4 lakh crore of its capital transfer to the government can be used for recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency. This proposal was opposed by the then RBI Governor Raghuram Rajan.