Bimal Jalan to head panel on RBI reserve; Rakesh Mohan to be vice chair

The Reserve Bank of India has formed an expert committee under former governor Bimal Jalan to decide the appropriate level of reserves that the regulator should hold. This comes more than a month after the bank’s central board proposed the panel’s formation following a dispute between then governor Urjit Patel and the government over that and various other issues, which eventually led to his departure.
The six-member panel has former deputy RBI governor Rakesh Mohan as its vice chairman and comprises economic affairs secretary Subhash Chandra Garg, RBI central board members Bharat Doshi and Sudhir Mankad and deputy governor NS Vishwanathan.

The panel will submit its report within a period of 90 days from the date of its first meeting.

It will review “the need and justification of various provisions, reserves and buffers” that RBI has maintained for contingency purposes and suggest an adequate level of risk provisioning.

The central bank said in its statement that the panel will “propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding less provisions than required.”

Former deputy governor R Gandhi said the committee members have been selected carefully.

“They should be able to see the long-term impact of the decisions they make and not be influenced only by short-term demand,” he said. “They will keep in view RBI’s long-term view for all periods, including high growth, low growth, forex inflows and outflows and have forethought in approaching the reserves matter.”

ET had first reported the possibility of Bimal Jalan heading this panel on November 22.

This will be the first time a panel on RBI’s economic capital framework will have government representatives. The previous three were headed by YH Malegam, Usha Thorat and V Subrahmanyam, all associated with the central bank, with the latter two having been deputy governors. The six-member Malegam committee on preparation of the RBI balance sheet in 2013 had two external experts but no government nominees, while the Thorat group in 2004 and the Subrahmanyam panel in 1997 were purely internal.

Garg had said last week that the government would seek an interim dividend from the RBI.

The issue of reserves had generated tension, with former governor Patel strongly opposed to any transfer of surplus funds. The RBI had transferred Rs 50,000 crore to the government in June.

The government felt that the RBI’s reserves exceeded its requirements and these could be used for productive purposes such as recapitalising public sector banks.

The RBI under Patel, who unexpectedly quit on December 11, also clashed with the government over ensuring liquidity for nonbanking finance companies and easing curbs on weak banks.

At the end of June, RBI’s total reserves stood at Rs 9.59 lakh crore, about a fourth of its Rs 36.18 lakh crore balance sheet. Of this, currency and gold revaluation reserves stood at Rs 6.91 lakh crore, Rs 2.32 lakh crore was in the contingency fund, Rs 22,811 in the asset development fund and Rs 13.285 crore in the investment revaluation account.

RBI transfers the surplus to the government after keeping all provisions and contingency buffers, according to its statutory mandate under Section 47 of the RBI Act. The reserves are meant for unforeseen contingencies, including depreciation in the value of securities, risks arising from exchange rate operations and other systemic challenges.

Former RBI governor Raghuram Rajan had said earlier this month that the transfer of excess reserves to the government may lower the central bank’s rating.

Former chief economic advisor Arvind Subramanian recently said, “If there are excess reserves, even in order to put it into recapitalising the banks, there must be fundamental governance reforms, otherwise it will be throwing good money after bad into a black hole.” He had first mooted the transfer of excess reserves in the FY17 Economic Survey.