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Bonanza For New Government

Reserves are needed for emergency and contingency as RBI is the lender of last resort.

Bonanza For New Government

The RBI board-appointed Bimal Jalan panel is likely to peg the central bank's surplus capital around Rs 1-3 lakh crore out of the Rs 9.5 lakh crore sitting in its books. The government had earlier asked RBI for return of surplus capital (not to bridge fiscal deficit as the finance minister said), though the then RBI Governor Urjit Patel had flatly refused.

Reserves are needed for emergency and contingency as RBI is the lender of last resort. RBI will oblige if the Jalan panel puts its stamp of approval. But how does the government plan to utilise the surplus funds? Experts suggest recapitalising state-owned banks or financing infrastructure. There are also fears that the new government will use the funds to finance programmes like Kisan and NYAY.

While there is a view that RBI is over capitalised, there are risks too. India needs a central bank with a strong balance sheet. Given the trade and current account deficit, there is always a danger on the currency side because of protectionist policies of the US or China. Also, RBI needs a strong balance sheet to create liquidity in the market. RBI has of late had to resort to rupee dollar swap to create liquidity because the banking sector doesn't have enough securities to tender through RBI's OMO (open market operation). Lastly, any direct transfer of funds from RBI to the government and its subsequent usage in the market will be highly inflationary if the government also continues with its borrowing spree.

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