- RBI Surplus reserves to the government… -Four basic pillars form the foundation - Vision

1. 27 August
ECONOMIC
SPOTLIGHT
REPORT
2019

2. 1
Economic Spotlight
27 August 19
1. RBI’s economic capital
A clear distinction was made between the two components of economic capital
i.e. realized equity and revaluation balance. Realized equity could be used for
meeting all risks/ losses as they were primarily built up from retained earnings.
Revaluation balances could be reckoned only as risk buffers against market risks
as they represented unrealized valuation gains and hence were not distributable.
Further, there was only a one-way fungibility between them which implies that
while a shortfall, if any, in revaluation balances vis-à-vis market risk provisioning
requirements could be met through increased risk provisioning from net income,
the reverse, i.e., the use of surplus in revaluation balances over market risk
provisioning requirements for covering shortfall in provisions for other risks is not
permitted.
The Central Board of the RBI has decided to transfer a sum of Rs 1,76,051 crore to
the Government comprising Rs 1,23,414 crore of surplus for the year 2018-19
and Rs 52,637 crore of excess provisions identified as per the revised Economic
Capital Framework (ECF) adopted.
RBI Surplus reserves to the government…
Four basic pillars form the foundation

3. 2
Economic Spotlight
27 August 19
4.Surplus Distribution Policy
The Committee has recommended a surplus distribution policy which targets the
level of realized equity to be maintained by the RBI, within the overall level of its
economic capital vis-à-vis the earlier policy which targeted total economic capital
level alone. Only if realized equity is above its requirement, will the entire net
income be transferable to the Government. If it is below the lower bound of
requirement, risk provisioning will be made to the extent necessary and only the
residual net income (if any) transferred to the Government.
2. Risk provisioning for market risk
The Committee has recommended the adoption of Expected Shortfall (ES)
methodology under stressed conditions in place of the extant Stressed-Value at
Risk for measuring the RBI’s market risk. While central banks are seen to be
adopting ES at 99% confidence level (CL), the Committee has recommended the
adoption of a target of ES 99.5% CL keeping in view the macroeconomic stability
requirements. In view of the cyclical volatility of the RBI’s revaluation balances, a
downward risk tolerance limit (RTL) of 97.5% CL has also been articulated.
3. Size of Realized Equity
The Committee recognized that the RBI’s provisioning for monetary, financial
and external stability risks is the country’s savings for a ‘rainy day’ (a
monetary/ financial stability crisis). This risk provisioning made primarily from
retained earnings is cumulatively referred to as the Contingent Risk Buffer
(CRB) and has been recommended to be maintained within a range of 6.5%
to 5.5% of the RBI’s balance sheet, comprising 5.5 to 4.5% for monetary and
financial stability risks and 1.0% for credit and operational risks

4. 3
Economic Spotlight
27 August 19
What does this mean?
The Union Budget had targeted Rs 90,000 cr as surplus transfer from the RBI.
With the amount now rising to Rs 1,76,051 crore, there would be a surplus of
about Rs 86,000 crore. Two vision can be looked at.
Vision 1
The Budget of FY20 (July) had assumed a very high growth in the size of the
Budget from around Rs 23.11 lkh crore (actual in FY19) to Rs 27.86 lkh crore in
FY20 (B) while presenting the FY19 (Revised) size at Rs 24.57 lkh crore. This was
probably a very optimistic scenario as garnering additional resources of Rs 4.76
lkh crore during a year when GDP growth is slated to slow down to less than 7%
and inflation be at around 3-3.5% was going to be challenging. In such an event,
these additional resources from RBI will help to shore up revenue.
Vision 2:
The Budgetary targets are met in the normal course of activity. In this situation,
the government will have this additional amount to spend as a stimulus and may
be part of the future announcements to be made by the FM.
Good news for the market?
Either ways, more money coming to the government either for meeting the
budgetary target or for extra expenditure has been seen positively as GSec yields
have already shown signs of dipping – 6.44% for GSec (10 year) against
yesterday’s closing of 6.51%.

5. 4
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Economic Spotlight