The Bimal Jalan committee, reviewing the Reserve Bank of India (RBI)’s economic capital framework, has advised exercising caution in the government drawing funds out of the central bank’s revaluation accounts.
Revaluation balances, accounting for 73 per cent of the RBI’s economic capital, was a key flashpoint between the central government and the central bank last year when former finance secretary Subhash Chandra Garg had suggested drawing funds from it.
“Revaluation balances held by commercial entities can be monetised by selling the assets in case of need. This option may not, however, be open to central banks. The RBI transferring ‘what it has not received’ could be seen as monetisation of fiscal deficit,” the committee’s report, which was made public on Tuesday, stated.
Terming the move as a “moral hazard”, the committee said it will become a precedent for using rupee depreciation to fund fiscal expenditure.
The report added that the transfer of valuation balances is not permitted under the RBI General Regulations and, if at all, the revaluation gains were to be realised, it would involve selling “a substantial portion of the RBI’s dollar assets” that could result in a range of domestic and global issues.
Garg, who was a part of the Jalan panel before he was replaced by his successor Rajiv Kumar, had vehemently argued for a transfer of funds from the RBI’s balance sheet to the central government to the tune of Rs 1 trillion in the form of “excess” revaluation balance, according to sources.
The RBI’s economic capital has drastically changed over the past two decades, with the unrealised revaluation balances now accounting for almost 73 per cent of the RBI’s economic capital in 2017-18, compared to 37.9 per cent in 1997. This was mainly on account of depreciation of rupee compared to dollar.
The government wanted to capitalise on it and demanded monetising the revaluation balance, mainly to recapitalise public sector banks (PSBs).
The committee recommended “that ‘excess’ revaluation balances, if any, should continue to remain on the balance sheet (of RBI) as risk buffers for market risk, till such time that they are realised through the sale or maturity of the underlying asset”.
If done so, the committee felt, the foreign exchange vulnerability will increase and it will “substantially lower future RBI income” as income-generating assets will be sold to monetise valuation gains.
“The realised surplus will be used to retire GoI securities, which will greatly reduce the RBI’s domestic portfolio, and thereby the effectiveness of monetary policy operations,” the committee said. It observed that other central banks could have an issue with monetising revaluation balances, especially if their currency is impacted.
The committee said the revaluation balances are highly volatile in nature. For instance, in 2006-07, 75 per cent of the RBI’s revaluation balances were wiped out, amounting to 1.5 per cent of the GDP. In 2016–17, the RBI’s revaluation balances fell more than Rs 1 trillion, due to an appreciating rupee and cross-currency movements.