RBI has 'adequate' reserves to transfer over Rs 1 trillion to govt: BoAML

The government for the second year in a row has pegged fiscal deficit at 3.3% of GDP this financial year

The Reserve Bank of India (RBI) has "more than adequate" reserves and that it can transfer over Rs 1 trillion to the government after a specially constituted panel identifies the "excess capital", says a report.

An RBI board meeting had last Monday decided to form a committee, which is likely to be announced later this week.

"We expect the proposed committee on the RBI's economic capital framework (ECF) to identify Rs 1-3 trillion which is 0.5-1.6 per cent of GDP as excess capital," analysts at Bank of America Merrill Lynch said in a note Monday.

The brokerage report said as per its stress tests, the central bank can transfer Rs 1 trillion to the government if the transfer is limited to passing excess contingency reserve and can go up to Rs 3 trillion if the total capital is included.

Giving a break-up, the report said Rs 1.05 trillion can be transferred if the contingency reserve is capped at 3.5 per cent of the RBI book. It further said this level will be 75 per cent higher than the average of BRICS economies, excluding India.

Additional forms of transfers can include Rs 1.16 trillion from the contingency reserves if one restricts to yield rise of 4.5 per cent as against 9 per cent at present.

Limiting the appreciation cover in RBI's currency and gold revaluation account to 25 per cent (Rs 53.25 per dollar) will release about Rs 720 billion to the government, it said.

It also said capping the overall reserves at 20 per cent of the RBI's book as against 28.3 percent now and higher than 18 per cent recommended by the Usha Thorat panel will be able to release Rs 3.11 trillion.

The statutes do not prohibit the transfer of excess capital to the government, it said, pointing out that the RBI Act places no bar as long as government maintains Rs 50 million of reserve funds under Sec 46 of the RBI Act.

While Section 47 enjoins the RBI to credit its annual surplus to the national exchequer, after provisions, it does not place any restrictions on further transfers, it added.

The RBI's contingency reserves at 7 per cent are higher than the BRICS (excluding India) average of 2 per cent, it said, adding the revaluation reserves are also on the higher side relative to BRICS central banks.

According to a press statement after the nine-hour marathon board meeting, the government and RBI will be jointly deciding on the panel constitution and also its terms of reference.

Following widespread criticism from many quarters, finance minister Arun Jaitley had said over the weekend that government did not need any support from the RBI's reserves for the next six months. However, multiple reports had claimed that the government is eyeing the extra cash which will help it in the run-up to the elections.

This comes amidst falling GST collections and little borrowing window left for the government, as it has already used up close to 96 per cent of borrowings as of end October. By taking the money from the RBI, the government will only increase its fiscal deficit, as it will have to issue bonds to the central bank.

The government for the second year in a row has pegged fiscal deficit at 3.3 per cent of GDP this financial year. Many analysts are expecting the government to overshoot this by at least 20-30 bps by March.