What's Wrong Between 'RBI and Government'

As the sole manager of government finances, the central bank RBI pays the government a dividend each year to help it meet its financial targets. Getting a huge dividend from the central bank helps the government meet its fiscal deficit target which ultimately attributes to the overall development of the country.

But the recent annual report of the RBI has some interesting information that every Indian must know.

RBI buying gold

The Reserve Bank of India (RBI) bought 40.45 tonnes of gold in the financial year 2019-20, taking its total holdings to 653.01 tonnes. In 2013, they even banned all imports except by nominated agencies, and of what was imported, 20% had to be exported back in some form. Later Gold bonds have been introduced to convert the demand for gold as a physical asset into financial savings.

RBI bought 40.45 tonnes of gold in the last year and paid Rs. 20,000 cr. for it. They just gave some dollars they owned and bought the gold.

Where is the gold? It's not in India. As much as 360.71 tonnes of gold was held overseas in safe custody with the Bank of England and the Bank for International Settlements, while the remaining gold (around 292 tonnes) is in India. If they had bought it with the idea that they might be able to reduce imports later by giving it up, understandable. But no. They bought it, and stored it abroad.

So if you are thinking that Instead of holding dollars, RBI is holding gold. What's wrong with it? The problem is, RBI is buying dollars too.

RBI buying dollars

• In June, RBI buys USD 9.814 billion.
• In May, the RBI had bought USD 4.363 billion.
• In April, RBI had sold USD 1.142 billion on a net basis.

That’s Rs. 360,000 cr. worth dollars bought in the last year. These funds might have parked in US Govt bonds.

Why is this bad? 

RBI is not paying dividends to the government which they deserve.

RBI has expanded its balance sheet by 30% by printing rupees to buy:

• Dollars ($43 billion, or Rs. 360,000 cr. worth)
• Gold (43.25 tonnes – about Rs. 20,000 cr. worth)
• Indian Government bonds (Rs. 180,000 cr. worth)

As per data, RBI has given a considerable amount to funds to government i.e. 180,000 cr but there is a big problem. Rs. 180,000 cr. is a debt, not dividends.

Because a bond is a debt. The Indian government already has reasonably high debt (though it’s tiny compared to say the US, UK or even China). Even more debt could see a downgrade of the government.

But instead, if RBI would have given it as a dividend, the government would see it as revenue and then borrow less, which reduces its need for debt. But the RBI has chosen not to do this. And retain itself a big fat amount in it’s balance sheet!

RBI has 53 lakh crores on the balance sheet. Of this, they have “equity” of Rs. 15 lakh crores. This is roughly 29% of the balance sheet. That’s absolutely huge!

The latest committe is the RBI Jalan Committee Report. You will find that the Jalan Committee clearly says that your TOTAL equity should not be more than 25.4% (lower bound: 20.8%). RBI can free up a lot of this to pay the government a big dividend.

Since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India. When you have too much equity, it’s like saying a subsidiary (RBI) refusing to pay it’s parent (Government) its fair share of profits.

RBI says it needs a “Contingency Buffer” but it never participates in contingencies – even the Yes bank rescue was done by SBI, effectively the government. The RBI never will participate directly – it is the government that needs the money.

Right now we own about $465 bn of rupees. At a 20% appreciation, if the rupee goes up by Rs. 15 to a dollar, so the USDINR will fall from Rs. 75 to Rs. 60. This is the worst imaginable case (according to Jalan committee). That would result in a requirement of a buffer of roughly Rs. 700,000 cr. We have Rs. 977,000 cr.

The excess buffer is over Rs. 277,000 cr. This can be transitioned to the government as dividend. Simple!

In order to help the government to fight from this pandemic RBI should:

1) Make equity come down to the Jalan Committee report recommendations (25%) 2) Give the government money to fight the Covid crisis.

What's your view?