Government’s Rs1.76 trillion RBI Bonanza Raises Fresh Stimulus Hopes


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NEW DELHI — After a board meeting, the Reserve Bank of India has decided to transfer Rs1.76 trillion to the government this fiscal which is supposed to address the precarious fiscal situation of the government to a great extent.

The transfer includes Rs1.23 trillion of surplus for 2018-19 and Rs52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting, RBI said in a statement on Monday. The higher surplus is due to the long-term forex swaps and the open market operations (OMO) conducted by the central bank over the last fiscal, reports livemint.

The surplus transfer was finalized in line with the recommendations of the committee under former central bank governor Bimal Jalan. RBI’s central board accepted all the recommendations of the committee.

Chart courtesy: The Hindu

The RBI had formed a committee chaired by former Governor Bimal Jalan to review its economic capital framework and suggest the quantum of excess provision to be transferred to the government.

The RBI committee has recommended a surplus distribution policy, which targets the level of realized equity to be maintained by RBI within the overall level of its economic capital, the statement said.

The additional amount of Rs86,000 crore that the government will receive this year above its budgeted Rs90,000 crore as transfers from RBI could be either used to provide fiscal stimulus to a sagging economy, reduce off-balance sheet borrowings or meet the expected shortfall in revenue collections.

“It is a surprise to a certain extent because we had expected it to be a staggered payment to the government instead of everything in one shot. The budget expected a Rs90,000 crore surplus transfer and this extra Rs80,000 crore, to my mind, will act as a cushion against the possible shortfall in revenue collection in FY20,” said Madan Sabnavis, chief economist at CARE Ratings. “Overall, I do not think that this will have inflationary pressures on the economy, since firstly, the current inflation levels are quite low and secondly, the government might not use this for spending and could instead use it to meet the possible revenue shortfall.”

“Jalan committee has given a range of 5.5-6.5% for Contingent Risk Buffer. My worry is all governments will work at the lower range of 5.5%, like they have done it for this year. It does not give RBI very much space to manoeuvre. Keeping RBI at the rock-bottom level is not a sensible idea, but I am afraid that is what is going to happen,” said Pronab Sen, former chief statistician of India.

The central board has also decided to set the economic capital level comprising the contingency fund and revaluation reserves as on 30 June at 24.5-20%.

In turn, the board has not touched the revaluation reserves, which comprises periodic marked-to-market unrealized/notional gains/losses in values of foreign currencies and gold, foreign securities and rupee securities, and a contingency fund.

The six-member panel headed by Jalan was appointed in December to review the ECF for RBI.




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