Balances in Contingency Fund (CF) and Asset Development Fund (ADF)(Crore):

Source: RBI Annual Reports

RBI's capital since inception has remained at Rs 5 crore. There is no clarity about the components reckoned for computing the RBI's capital and capital-like reserves at 32 per cent of balance sheet total. The Survey obviously has depended on the computation of figures by some external agency(the graph given in the Survey is attributed to BIS) instead of quoting from RBI's Annual Reports.

To meet the internal capital expenditure and make investments in its subsidiaries and associate institutions, the Reserve Bank had created a separate ADR in 1997-98 with the aim of reaching one per cent of the Reserve Bank's total assets within the overall indicative target of 12 per cent of the total assets set for CF and ADF taken together, accepted by the Bank earlier.

Obviously, the practice of transferring the entire 'surplus income' to government when the reserves position of the central bank shows a continuous declining trend(as a percentage of total assets) in the context of the present growth rate of Bank's asset size, needs a review. Considering the size of RBI's balance sheet, and remembering that the Bank's share capital(5 crore) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total assets which was accepted by the Bank decades ago.

The accounts presented in the RBI Annual Report 2014-15 (Chapter XI-Introductory) shows that the balance sheet size of the Reserve Bank increased by 10.09 per cent for the year ended June 30, 2015 primarily due to increase in foreign currency assets on the asset side which rose by 21.50 per cent and increase in notes in circulation and deposits which rose by 9.57 per cent and 37.60 per cent respectively on the liability side. While gross income for the year 2014-15 increased sharply by 22.66 per cent, the total expenditure increased by 11.92 per cent. The year ended with an overall surplus of 65,896 crore as against 52,679 crore in the previous year, representing an increase of 25.09 per cent. The entire surplus has been passed on to central government. This is based on a review of reserves position made by an internal panel headed by one of the Bank's directors Mr Y H Malegam which concluded in 2014 that the level of reserves then available was adequate to meet the needs for the subsequent three years.

RBI's reserves

Contingency Reserve (now renamed Contingency Fund-CF) represents the amount set aside on a year-to-year basis for meeting unexpected and unforeseen contingencies, including depreciation in the value of securities, exchange guarantees and risks arising out of monetary/exchange rate policy operations. In order to meet the needs of internal capital expenditure and make investments in subsidiaries and associate institutions, a further sum is provided and credited to the Asset Development Reserve (now Asset Development Fund-ADF). From its income in 2014-15, RBI has transferred Rs 1000 crore to ADF to provide for further investment as capital in the National Housing Bank. Such need-based transfer, though necessary in the present scenario of depleting reserves, can cause future embarrassments to the central bank, as there will be pressure on quantum and timing of use of such 'ear-marked' contributions.

The Annual Report says that based on the recommendations of the Technical Committee [Chairman: Shri Y.H.Malegam (Technical Committee II)] constituted during 2013-14 to review the Level and Adequacy of Internal Reserves and Surplus Distribution Policy of the Reserve Bank of India, the forward contracts entered into by the Bank as part of its intervention operations are being marked to market on yearly basis as on the balance sheet date from the year 2013-14 and, as against the earlier policy of ignoring gain and accounting for loss only, now both gain or loss are accounted for. This change in policy seals another source of accretion to Bank's reserves.

To ensure that temptations of government emanating from internal and external compulsions, like the one quoted at the beginning of this article, do not dilute the strength of RBI's balance sheet, GOI should take measures to augment the share capital 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. Needless to say, any effort to re-deploy the central bank's capital funds should be abandoned as such action under 'direction' will affect the functional freedom of RBI to use various tools in the central bank's kit independently in times of need.

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