UNCLUTTERING THE CLUT­TER

Financial Chronicle - - FRONT PAGE - VK SHARMA For­mer ex­ec­u­tive direc­tor, Re­serve Bank of In­dia

WHY cur­rency and gold reval­u­a­tion ac­count and in­vest­ment reval­u­a­tion ac­count credit bal­ances shown as part of the cap­i­tal and re­serves on the RBI’s bal­ance sheet can­not be trans­ferred to Gov­ern­ment of In­dia

These re­serves are noth­ing but reval­u­a­tion re­serves which rep­re­sent pe­ri­odic marked to mar­ket un­re­alised gains/losses in the value of as­sets on the RBI’s bal­ance sheet and cur­rently add up to about Rs 7 tril­lion on RBI’s to­tal as­sets of about Rs 36 tril­lion, con­sti­tut­ing about 20 per cent of to­tal as­sets. The other com­po­nent of RBI’s cap­i­tal and re­serves of Rs 2.5 tril­lion, con­sti­tut­ing about 7 per cent of to­tal as­sets, com­prise eq­uity cap­i­tal and con­tin­gency fund aris­ing from in­ter­est in­come. Thus the to­tal cap­i­tal and re­serves add up to about Rs 9.5 tril­lion con­sti­tut­ing 27 per cent of to­tal as­sets on RBI’s bal­ance sheet. As re­gards the first com­po­nent, namely, reval­u­a­tion re­serves of Rs 7 tril­lion, the only way it can be trans­ferred to gov­ern­ment is by ac­tu­ally sell­ing the Rs 33.5 tril­lion (Rs 36t-Rs2.5t) worth of RBI’s as­sets, and that too, if and only if, the value of as­sets be­ing sold does not go down, which it def­i­nitely will, given the sheer size of the as­sets (93 per cent of its to­tal as­sets) on sale! Even if we as­sume for the sake of ar­gu­ment that it doesn’t, and will not, go down, this will still re­sult in the mas­sive col­lapse/ shrink­ing/con­trac­tion of RBI’s bal­ance sheet, and, there­fore, equally also of the high pow­ered re­serve/base money and the match­ing col­lapse/ shrink­ing/ con­trac­tion in the broader money sup­ply M3, de­liv­er­ing the cat­a­strophic and cat­a­clysmic shock, bor­der­ing on a ver­i­ta­ble fi­nan­cial and eco­nomic nu­clear win­ter, to the real econ­omy within no time with the match­ing col­lapse in out­put and em­ploy­ment due to in­vol­un­tar­ily re­sult­ing ex­cep­tion­ally high in­ter­est rates!

The other com­po­nent worth Rs 2.5 tril­lion can of course be trans­ferred but at the cost of mak­ing of RBI’s core Tier 1 cap­i­tal to as­sets ra­tio zero!

— The ar­ti­cle is avail­able in the author’s blog

Reval­u­a­tion re­serves rep­re­sent pe­ri­odic marked-to-mar­ket un­re­alised gains/losses in the value of as­sets on RBI’s bal­ance sheet

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