Mumbai: The Bimal Jalan committee studying the appropriate level of capital reserves for the Reserve Bank is likely to identify excess reserves of up to Rs 3 lakh crore ($43 billion), or 1.5 per cent of gross domestic product, according to foreign brokerage Bank of America Merrill Lynch.
“We expect the Jalan committee to identify RBI’s excess capital at Rs 1-3 lakh crore/0.5-1.5 per cent of GDP in its report expected shortly,” said Indranil Sen Gupta, Chief India Economist at BofAML.
As of September last, the excess capital with the central bank stood at Rs 9.6 lakh crore.
“Our stress tests throw up a range of Rs 1 lakh crore plus (only from contingency reserves) to Rs 2 lakh crore (20 per cent total capital) to Rs3 lakh crore (contingency reserves plus the revaluation reserves), said Sen Gupta.
Wondering if the RBI can transfer beyond its annual surplus to the fisc, Sen Gupta said the 1934 RBI Act places no bar if the Ministry of Finance maintains Rs 5 crore/$0.7million of reserves under Section 46.
The six-member panel headed by former RBI governor Jalan was set up following a widespread debate triggered by a government move last year to get a part of the RBI reserves transferred ahead of the elections. Then governor Urjit Patel was against any such move, while other experts like former chief economic advisor Arvind Subramaniam, had advocated using the windfall for specific tasks, like bank recapitalisation, which will help the economy. However a central bank-backed think-tank has found that the RBI’s capital buffer is below the global average capital to asset ratio.
The Jalan panel is likely to submit its report in the coming weeks.
According to Sen Gupta, India’s central bank maintains higher contingency reserves as a percentage of its total book compared to BRICs average.
Halving of the contingency reserves to a level of 3.25 percent from the present 6.5 per cent will release Rs 1.282 lakh crore, he said, pointing out that the level is still 50 per cent higher than what central banks in the BRICS grouping have. Along with revaluation gains, RBI would be in a position to transfer the excess reserves to the government, which can be used to recapitalise the country’s struggling state-run banks, he said.
India’s central bank books revaluation gains on the foreign currency assets and gold holdings. Those holdings are currently just above $400 billion.
Using the excess money for bank recapitalisation will be liquidity neutral, the brokerage said.
