When we talk of transferring RBI reserves to the government just what do we mean? The RBI has a very different kind of a set of accounts because by the very nature of a central bank it has assets without any real liabilities unlike a bank. It creates money and enables transactions in the country and uses the same for buying government paper through its monetary operations. The income earned on these securities in a way goes back to the government as dividend. It holds forex reserves and invests the same and earns income. There are no significant expenditures as can be seen in the abridged statement given below for FY18 and hence there is a large surplus which is given to the government.
Now, the balance sheet is where the reserves appear which has given rise to debate. The size of the balance sheet is around Rs 36 lakh crore in 2017-18 and around 30 per cent is classified as other liabilities which include a currency and gold revaluation account (CGRA) of Rs 6.9 lakh cr. Intuitively it can be seen that if forex assets, which are valued at Rs 26.34 lakh crore, go up due to weakening rupee, then the CGRA has to increase to match the assets. The CGRA can go up or down and hence asa prudent practice is not touched. Now, it has been argued that some part of these reserves can be given to the government as there is a contingency item already available.
The purpose here is to look at the mechanics of the transfer and not debate the act of transfer.
Alternative 1 is to convert the excess CGRA into currency so that total liabilities remain the same. But this will mean printing excess currency, which say is Rs 3 lakh crore. This can create turmoil in the market as interest rates will crash.
Alternative II is to match the quantum of reduction in with forex reserves so the assets side matches. But if forex is sold in the market, banks will buy them which will drain out liquidity and lead to other problems. Besides, we cannot sell dollars because we could need them at a later time to stabilize the rupee.
Alternative 1 is to convert the excess CGRA into currency so that total liabilities remain the same. But this will mean printing excess currency, which say is Rs 3 lakh crore. This can create turmoil in the market as interest rates will crash.
Alternative II is to match the quantum of reduction in with forex reserves so the assets side matches. But if forex is sold in the market, banks will buy them which will drain out liquidity and lead to other problems. Besides, we cannot sell dollars because we could need them at a later time to stabilize the rupee.
Alternative III is to sell off GSecs i.e. domestic investments which are akin to OMO sales. Here liquidity is removed and this shortfall will lead to higher rates. The RBI cannot come in again and supply liquidity to buy such securities under OMO as it will mean return to status quo. This situation is not tenable.
Alternative IV is to lower the CGRA and also GSecs in an accounting sense so that government debt is written off. This sounds feasible since it will not monetize the economy and will help the government in lowering its debt level. With the government securities amounting to Rs 56 lakh crore, reducing the same by say Rs 3 lakh crore will be beneficial as the government can save about Rs 25,000 cr in interest payments which can be used for other purposes. This sounds pragmatic and will bebeneficial as the government can save about Rs 25,000 cr in interest payments which can be used for other purposes. This sounds pragmatic and will be beneficial but will not help in getting in large amounts of money.
Alternative V is to shrink the balance sheet size by taking forex reserves out and keeping it in a suspense account which can come in handy when required. This may not be permitted in conventional accounting sense. But the analogy can be that the MSS securities are held out of sight of the government and do not enter the fiscal deficit though interest is paid on them. A similar arrangement can be worked out based on whether the accounting standards permit them.
The last option is to only gradually release the reserves by lowering either the GSec or forex reserves so that after 5-10 years the amount disappears. The panel will examine these options and more when working out the transfer process, but for sure it will be interesting.
The last option is to only gradually release the reserves by lowering either the GSec or forex reserves so that after 5-10 years the amount disappears. The panel will examine these options and more when working out the transfer process, but for sure it will be interesting.
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