Strengthening Reserve Bank of India

Online comments posted on July 14, 2014:

The pressures on GOI and particularly Finance Ministry are such that  on several occasions they succumb to them for ‘political’ or ‘survival’-related reasons. The Indian Financial Sector and government finances(including state government finances) are supported by a strong central bank. RBI’s strength depends also on its strong balance sheet. In this context, copied below is the concluding paragraph of Chapter II.1 “Strengthening the Central Bank” from my recently published book “Banking, Reforms & Corruption; Development Issues in 21st Century India”(Sampark, Kolkatta, Email:
“Way forward
To ensure that temptations of government emanating from external compulsions do not dilute the strength of RBI’s balance sheet, GOI should take measures to augment the share capital and reserves of RBI after carrying out appropriate amendments to RBI Act. Till such time RBI should be allowed to retain surplus income by transfer to reserves. Considering the size of its balance sheet and the internal and external pressures on its income generating capabilities, as also the nature of shocks the Bank has to absorb from time to time, the central bank’s reserves need to be augmented on an ongoing basis.”
 M G Warrier

Media report:

Financial Express, July 14, 2014

RBI dividend in FY15 may be more than budgeted

Raj Kumar Ray , Arup Roychoudhury | New Delhi | Published: Jul 14 2014, 02:14 IST

SummaryThe growth in RBI’s surplus has allowed it to scale up dividend payouts to the fiscally stressed government to an unprecedented level.

The growth in RBI’s surplus has allowed it to scale up dividend payouts to the fiscally stressed government to an unprecedented level. Finance secretary Arvind Mayaram told FE that RBI will pay R46,000 crore to the government as dividend this fiscal, compared with R33,010 crore last fiscal and a similar amount envisaged in the interim budget. This year's dividend amount could turn out to be even higher, due to the new accounting philosophy recommended by the Malegam panel for the central bank, he said.
The surplus with RBI, which follows July-June accounting year, jumped 43.6% to R61,804 crore in 2012-13.
In 2011-12, RBI paid R16,010 crore to government as dividend and in the previous few years too, the amounts hovered around that level or slightly above R20,000 crore. Of course, RBI paid R45,719 crore as dividend in 2006-07 but that was due to the sale of the central bank's R34,308-crore stake in State Bank of India.
Except the high payout in 2006-07 due to a one-time event, payment made in the accounting year 2012-13 has so far been the highest annual dividend given by RBI to the government.
Mayaram said the move follows the recommendations of the YH Malegam for restructuring of the RBI books, the way its various incomes have to be set aside as reserves and the surplus transferred to the government. RBI sets aside a portion of its profits as reserves before declaring dividend to the central government. Over the years, sufficient balance has been built up in various reserves and so RBI has decided to pass on higher dividend to the government. The dividend declared in 2014-15 has been revised upwards.
During accounting year 2012-13, RBI had a surplus of R61,804 crore, an increase of 43.6% over 2011-12. After making provisions for transferring some of its surplus to Contingency Reserve and Asset Development Reserve and others, RBI paid R33,010 crore to the government which was accounted for in the FY14 Budget.
“The Malegam Committee had said that this year RBI should not add to its reserves. It has sufficient reserves... and has to look at what is the most prudent level of reserves for the purpose of monetary stabilisation. The RBI clearly states what is the surplus made by it and that is transferred to the government. Their accounts have not been cleared, but when R13,000-crore figure was taken (as additional dividend for FY15 over FY14 level) that was as per the indications from RBI,” Mayaram told FE in an interview. The official added that there was a possibility that the dividend would be even higher.


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