Who owns RBI’s Profits?

Dr. Ashwani Mahajan
A new controversy has started after a recent speech by RBI’s Deputy Governor Viral Acharya, that Government is exerting pressure on RBI to transfer its reserves to the exchequer. He said that it would be highly dangerous to transfer the amount to the Government. In this context a pertinent question arises who has the right over the profits or accumulated profit, that is, reserves of the RBI. As per RBI Act, RBI was to create a Reserve Fund of rupees 5 crores. Board of directors of the RBI has the power to decide about balance sheet of RBI. However, the board has to take approval of the Central Government for the same. Some years ago, the RBI’s board, under Section 47 of RBI Act, created an ‘Operational Reserve and Revaluation Account’ with an objective to take care of upheavals in the value of its assets and to fulfill its unforeseen needs. By June 2018, the reserves with RBI reached rupees 9.63 trillion, which was 28 percent of its total assets. No Central Bank in the world has so much of reserves fund.
It is important to understand that Central Bank of any country is no ordinary bank. Its credit risk is almost negligible. Therefore, requirement of reserves for a Central Bank is almost negligible. Therefore we cannot apply ‘Basel norms’ for keeping reserves for capital requirements for Central Banks.’ According to former chief economist of IMF, Prof Olivier Blanchard Central banks can be run on even negative equity capital. Moreover, for maintaining reserves, kept by RBI, approval has not been taken from the Central Government, nor the RBI Board has made rules for the utilisation of these reserves. Board has also not made any framework for equity capital of RBI. As per RBI Act the Reserve Bank needs reserves of any rupees 5 Crores. It is expected from RBI board to make regulations governing the manner and form in which the balance-sheet of the Bank shall be drawn up. But for this the prior sanction of the Central Government is needed. World over the profits of central banks are transferred to their respective Governments. We can conclude that RBI has no right over its profits/reserves. However, since huge reserves have been built over the years (without statutory sanction), sudden transfer of these reserves, even partially may cause problems, as that may cause inflation. Therefore, we can have discussion over these issues. We need to understand that at the first instance RBI does not need to keep these huge reserves; and secondly they don’t have the right to withhold its profits from the government, as society has the right over these accumulated profits.
What is the use of reserve fund?
Recently ex-Governor of RBI Bimal Jalan has said that this fund needs to be utilised in such a way that whenever creditors need money, bank may fulfill this requirement without printing of more currency. These reserves can also be used for exchange rate management. However the basic questions are whether RBI needs these huge funds and do they have requisite legal sanctions. Therefore, pertinent questions are being raised about keeping these huge funds as reserves.
The objection of the Deputy Governor of RBI, Viral Acharya that if these reserves were transferred to the Government, the same may prove to be dangerous, is not a logical one. He cites example of Argentina in this regard. This statement is misleading, as there is a big difference between India and Argentina as far as financial management of the two countries is concerned. Argentina had defaulted several times in its repayment of foreign loans. Its credit rating is very low. The statement by an officer of the rank of a Deputy Governor is highly objectionable, as it distorts the image of the country internationally. Even as per the law of the land only Central Government owns the right over these reserves and profits of the RBI. Moreover RBI does not have the Central Government’s sanction to create and maintain these reserves. RBI board has also failed to make rules for utilisation of these reserves. Annual report of RBI 2015 had stated that RBI Board will make the framework for equity capital, which has not been done by the board so far. Therefore, RBI Board needs to consider making rules about the utilisation of these reserves, built over the years by accumulating profits of the RBI. Globally these profits are transferred by the central bank to their respective governments. These funds with RBI have been accumulated by flouting this principle. Reserve Bank board in its meeting on November 19th, 2018 must discuss about this reserve fund. Costs and benefits of transferring these reserves to the Government may also be discussed. This may be an argument that by sudden transfer of these reserves may cause inflationary pressures. Therefore, board can decide about the time schedule for transferring these reserves to the Central Government.
The nation is looking at the conclusion of the unwanted debate on this issue started by a Deputy Governor of RBI. However, this is also clear that RBI board needs to take some stern and clear decisions. RBI officials need to understand that RBI Board is not a rubber stamp. RBI Board has to discuss various issues in context of the ground realities of the country, within the framework of the constitution, including this issue of how to handle these excessive reserves with RBI.
(The author is Associate Professor, PGDAV College, University of Delhi)
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