How can the RBI's surplus capital be used for several purpose by the Government of India? Discuss the possible economic objections to such a strategy. (200 Words)
Enrich the answer from other sources, if the question demands.
IAS Parliament 5 years
KEY POINTS
Surplus could be used in several good ways
· Recapitalizing a Public Sector Asset Rehabilitation Agency (PARA) as mentioned in economic survey2016-17.
· Infusing Capital for the Public sector banks as per recommendations of Bimal Jalalan Committee
· For extinguishing debt to demonstrate that the government is serious about a strong public sector fiscal position.
· 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.
· It must also be done with the full cooperation of the RBI to ensure that the RBI’s independence and credibility are in no way undermined.
Possible economic objections to such a strategy
· Adequacy of buffers since a large chunk of RBI’s assets (nearly 70 per cent) are in the form of net foreign assets (NFA), it must maintain a high equity to assets ratio.
· Larger the NFA to total assets ratio of a central bank, the more vulnerable it is to exchange rate volatility risks.
· Likelihood of capital losses, valuation losses will arise when the rupee appreciates. It is therefore clear that such capital losses could never be allowed to be inflicted on the RBI.
· There is a fundamental asymmetry in the operation of central banks. Their supply of foreign currency is limited but their supply of domestic currency is unlimited.
· So, if the currency starts appreciating, the RBI can intervene to prevent it by buying dollars and supplying rupees. This cannot be always possible with currency depreciation because at some point of time the RBI will run out of dollars.
· If the excess capital were redeployed toward recapitalizing the banks, the operation would involve is the government altering the composition of its balance sheet, transferring its equity holdings from the RBI to the commercial banks. The RBI would have no equity in the commercial banks. Nor would there be any implications for monetary policy.
cyri 5 years
review
IAS Parliament 5 years
Try to include data to support your arguments. Keep writing.
Aspirant 20 5 years
IAS Parliament 5 years
Good attempt. Try to include about impact of fiscal and monetary policy. Keep writing.
Mirudula Parthibarajan 5 years
Kindly review my answer
IAS Parliament 5 years
Try to include about impact on monetary and fiscal policy, capital loss for RBI. Keep Writing.
Siddharth 5 years
Please review sir. Thanks.
IAS Parliament 5 years
Definition of surplus is not needed. Try to include from economic survey. Keep Writing.
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