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Rs 730,000 crore in CGRA account can’t be transferred to govt

George Mathew
For the year ended June 2018, the RBI had total reserves of Rs 9.6 lakh crore, comprising mainly CGRA (Rs 6.91 lakh crore) and contingency fund (Rs 2.32 lakh crore).

The Central Board of the Reserve Bank of India has decided not to transfer any amount from the CGRA (currency and gold revaluation account), which has Rs 730,000 crore of unrealised gains, to the government as recommended by the Bimal Jalan committee.

CGRA comprises unrealised gains or losses on foreign currency assets and gold due to movement in exchange rate and prices of gold. There will be no distribution of unrealised revaluation balances. This effectively means bulk of the RBI s Rs 10 lakh crore surplus mostly lying in CGRA can t be touched. This policy, as proposed by the committee, will be in vogue for the next five years. The contention of the RBI Board as well as the Jalan committee is that central bank doesn t have the money in its CRGA account as it s unrealised balance.

For the year ended June 2018, the RBI had total reserves of Rs 9.6 lakh crore, comprising mainly CGRA (Rs 6.91 lakh crore) and contingency fund (Rs 2.32 lakh crore). CGRA has now risen to Rs 7.3 lakh crore. Though the RBI s economic capital could appear to be relatively higher, it is largely on account of the revaluation balances which are determined by exogenous factors such as market prices and the RBI s discharge of its public policy objectives.

The RBI s economic capital has undergone a significant transformation over the past 20 years, with unrealised revaluation balances now accounting for almost 73 per cent of RBI s economic capital. Unrealised valuation buffers will be used as risk buffers against market risks. As a result, the excess realised equity as on June 30, 2018, ranges from Rs 26,280 crore (at upper bound of contingent risk buffer, or CRB) to Rs 62,456 crore (at lower bound of CRB).

One of the contentious issues in the conflict between the government and the RBI under Urjit Patel was the size of the central bank s reserves, which at Rs 9.6 lakh crore was then perceived as being excessive by the government. The government last year sought transfer of Rs 3.6 lakh crore surplus, more than a third of the total Rs 9.6 lakh crore reserves of the central bank to the government. The ministry had then suggested that this surplus can be managed jointly by the RBI and the government.

The identified excess capital of Rs 52,637 crore transferred by the RBI to the government is much lower than expectations of a transfer Rs 2-3 lakh crore. However, this disappointment was blunted owing to a much higher than expected normal pidend transfer for the current year which, if used judiciously, can be invaluable in making the Budget math sound more credible.

The RBI witnesses considerable accretion to its revaluation balances (CGRA) during periods of external stress (i.e. 2008, 2011 and 2013) when the trend towards depreciation is markedly strong. Further, a rapidly appreciating rupee can force the RBI to intervene, increasing the size and currency mismatch of the balance sheet as well as depleting the CGRA. If liquidity absorption operations become warranted, there could be substantial decrease in the RBI s income as open market operations reduce holdings of government securities and interest outgo on account of reverse repo operations (though it may counteract to an extent the increased balance sheet size).

The CGRA can be used not only for meeting the risks of USD-INR, cross-currency and gold price movements, but also for interest rate risks. Similarly, the Investment Revaluation Account-Rupee Securities and IRA-FS Investment Revaluation Account-Foreign Securities can meet currency and gold price risks in addition to the interest rate risks.

In his speech on October 26, 2019, which brought into open the tussle between the Finance Ministry and the central bank, the then RBI Deputy Governor Viral Acharya said how a transfer of excess reserves from a central bank to the government can be catastrophic, as had been proven in the case of Argentina. The transfer of $6.6 billion of its central bank s reserves to the national treasury, sparked off the worst constitutional crises in Argentina and led to a grave reassessment of its sovereign risk , Acharya had asserted.

The RBI transferred a surplus of Rs 265,110 crore to the government during the 2014-18 period. This is 90 per cent of the net income. In 2017-18, the RBI transferred a surplus of Rs 50,000 crore to the government (comprising an interim transfer of Rs 10,000 crore), up from Rs 30,659 crore in 2016-17, but lower than in the previous three years.