Skip to main content

RBI Decides Not to Touch Valuation Gain

The board of Reserve Bank of India, under new governor Shaktikanta Das, has set the basic rule that would determine future payout by the central bank to the government. At its last meeting, the board is learnt to have recorded the decision that the central bank will not touch the ‘unrealised gains’ in its balance sheet for dividend distribution to its sole shareholder, the government. “Unrealised gain is valuation gain in currency and gold. To tap this, it has to be realised or converted in the market. This is now ruled out… this has been minuted,” a person familiar with the matter told ET.
Of RBI’s total reserves of ?10.46 lakh crore, about ?6.9 lakh crore is recorded under ‘currency and gold revaluation account’ while ?2.32 lakh crore is ‘contingency fund’. The quantum of dividend to the government and the sharing of any surplus over and above RBI’s economic capital has been a contentious issue between RBI and the government reviving the old question on what’s the optimum capital that RBI should maintain.
Partly Defines Terms of Reference
A high-profile committee, headed by former RBI governor Bimal Jalan, has been constituted to look into RBI’s economic capital framework. Under the circumstances, the central bank’s decision partly defines the terms of reference of the committee. Its findings would indicate whether RBI has surplus capital that can be distributed to the government, whether the central bank can dip into contingency reserves for payout, and to what extent RBI needs to add to its contingency reserves before arriving at the dividend number in the current financial year as well as in the future. While the RBI Act does not restrict the bank from sharing a slice of its contingency fund, the board may have to pass a resolution for it to be endorsed by the auditor, said a chartered accountant who has handled RBI audit in the past.
Unlike regulatory capital of financial institutions, the ‘economic capital’ of a central bank is calculated using mathematical models that consider the nature of risks it may have to grapple with. While some studies have pointed out that RBI’s capital level is one of the highest in the world — way above large central banks like Bank of England and US Federal Reserve – there are others who believe that the central bank needs to preserve a higher capital due to India’s current account deficit and absence of a reserve currency (like US dollar or Euro).
FINANCIAL INCLUSION
RBI is likely to set up a new committee that would look into the future of financial inclusion and recommend ways to overcome the shortcomings. Sources said that former UIDAI chairman and Infosys co-founder Nandan Nilekani may be approached to head the proposed committee. “The use of technology to touch the unbanked, bank account portability, and issues like open banking may be considered… RBI’s focus has largely been credit delivery but more work may be required on the savings front,” said another person.
A recent report of Niti Aayog said that while the government has launched many flagship schemes to promote financial inclusion and provide financial security to empower the poor, there are constraints due to lack of financial literacy among low-income households and small informal businesses, and high cost of operations of traditional banking model. According to the government think tank, excessive regulatory requirements on products and market entry, and conservative regulatory approach to new technologies are the other impediments.

The Economic Times, 31th December 2018

Comments

Popular posts from this blog

Govt’s gamble on GST cuts: What do the bond and currency markets signal?

  It’s not just humans who suffer from cognitive biases; markets do too. Interestingly, different financial markets exhibit distinct biases, each interpreting events through its own prism of prejudice. Take the recent announcements on GST reforms: equity markets have chosen to view them through the lens of growth, while bond and currency markets are focusing on potential macroeconomic risks—fiscal pressures and current account challenges. So, which lens captures the true pulse?Equity markets may be right in expecting GST reforms to revive consumption, which has remained lacklustre for a while. But the key question remains—will this revival come at the cost of broader macro stability?It is well known that consumption stocks have rallied since the GST rationalisation announcement. But what about bond markets? What signals are they sending since this rejig was announced from the ramparts of the Red Fort?The signs aren't encouraging. Bond prices have slumped and yields have surged sinc...

Luxury carmakers urge clarity on GST rates to boost festive season sales

  A clear picture regarding new GST rates at the earliest will help the overall auto industry, including the luxury car segment, to regain momentum in the ongoing quarter, which generally sees enhanced sales on account of the festive season.The high-powered GST Council, chaired by Finance Minister Nirmala Sitharaman, will meet on September 3-4 to discuss moving to a two-slab taxation.In an interaction with PTI, BMW Group India President and CEO Hardeep Singh Brar said the recent speculation about the change in GST rates has caused uncertainty in the minds of consumers.Consumer interest and demand is strong, but they (prospective buyers) have adopted a wait-and-watch approach, and this delayed decision-making is impacting new vehicle sales at a certain level, he noted."Expediting clarity on GST rates is essential to get back to speed and ensure the auto sector's contribution to economic growth during this quarter is robust," Brar stated.He also hoped that the sustainable p...

Sebi proposes tighter norms for green bond third-party reviewers

  Sebi on Friday said it has proposed to tighten the norms to appoint independent third-party reviewers or certifiers for green debt securities to align them with requirements for other ESG-linked bonds.In a draft circular, Sebi said that the current norms for green bonds, introduced in February 2023, lack detailed requirements around reviewer independence, conflict of interest mitigation, and disclosure standards that are now in place for other ESG-linked securities under a June 2025 circular.The regulator's latest proposal seeks public comments on a revised framework that would bring parity by incorporating comprehensive criteria for third-party certifiers of green bonds on non-convertible securities.Under the proposed norms, issuers of green debt securities will need to appoint reviewers who are independent of their management, directors, and key managerial personnel. These reviewers will be remunerated in a way that prevents any conflicts of interest and possess relevant expert...