Use RBI equity to recapitalise PSBs

The Economic Survey 2016-17, released on Tuesday, yet again harped on using the Reserve Bank of India’s (RBI) equity to recapitalise government banks. It argued after demonetisation, the “windfall” would boost the central bank’s finances.

Last year, when the Survey made this suggestion, then RBI governor Raghuram Rajan was critical of the proposal, arguing high equity was needed for the stability of the central bank.

After Prime Minister Narendra Modi announced the demonetisation of the old series ~500 and ~1,000 notes on November 8, people had till December 30 to deposit the old notes in banks. This led to the “windfall” of swelling deposits.

This year, the Economic Survey has argued the central bank had more than adequate equity. In fact, it had the fourth largest equity as a per cent of central bank balance sheet in the world. From this, the RBI could easily return ~4 lakh crore to the government.

“There is no particular reason why this extra capital should be kept with RBI. Even at current levels, RBI is already exceptionally highly capitalised… So, it would seem to be more productive to redeploy some of this capital in other ways,” the Survey argued.

RBI’s argument has been that since nearly 70 per cent of its assets are in the form of net foreign assets (NFA), high equityto-assets ratio was needed. But the Survey argued the larger the NFA-to-total assets ratio of a central bank, the more vulnerable it was to exchange rate volatility, particularly if the rupee appreciated.

Rather, the money could be used to recapitalise banks or a Public Sector Asset Rehabilitation Agency (PARA), or for extinguishing debt to demonstrate that the government was serious about a strong public sector fiscal position, the Survey said.

“The key principle that should be observed in this process is that the excess capital in the RBI, including that created by demonetisation, is a balance sheet or wealth gain and not an income gain. Hence, the uses to which this is put should be of a balance sheet nature.”

The Survey argued RBI had more than adequate equity. In fact, it had the fourth largest equity as a per cent of central bank balance sheet in the world