Analysis of the balance sheets of the central banks of 10 comparable economies shows that the RBI's reserves as a percentage of its balance sheet is among the highest, a report by consultancy firm Quantum Advisors found.
However, the bulk of these reserves are notional and thus their value can only be unlocked when the underlying assets are sold, the report added. This makes transferring the excess reserves to the government all the more difficult.
Finance Minister Arun Jaitley on Monday said that the government was not seeking the RBI’s surplus to meet its fiscal deficit needs.
“This government has the best track record than any other previous government in managing the fiscal deficit,” Mr. Jaitley said in the Lok Sabha. “We do not need RBI reserves to manage the fiscal deficit.”
BRICS countries
The analysis, which looked at the central banks of the BRICS countries, Fragile Five nations and three developed economies, found that the RBI’s reserves — which a separate analysis shows was about ₹10.5 lakh crore — form 26.2% its balance sheet. Only two central banks — those of South Africa and Russia — have a reserve ratio higher than this.
The other two BRICS nations, China and Brazil, have reserve ratios of 1.7% and 0.2%, respectively.
“On comparing their balance sheets, you do notice that the RBI indeed has higher reserves,” the report said.
Revaluation of assets
“But… the bulk of those reserves are arising out of the revaluation of its assets, i.e over the years as the rupee depreciated against the U.S. dollar, Great Britain Pound, euro etc, gold and foreign assets held by the RBI when translated into the current rupee value, leads to an increase in its asset value.”
“For example, 100 billion invested in 2010 at USD/INR of 45, valued today at USD/INR of 70, will show a valuation gain when reported in INR terms,” the report added. “All such gains are non-cash, notional and are shown as higher asset values and as revaluation reserves on the liabilities side,” the study said.
These gains from the currency exchange movement will be booked and the cash realised only when the assets are sold. As such, the RBI does not have very high free cash reserves that it can give back to the government, the report concluded.
The report goes on to say that the RBI has a few options in front of it if the government does insist on the transfer of reserves. The first is for the central bank to sell its foreign bonds or government bonds, depending on how much the Centre asks for.
Selling foreign bonds is easier done, the report said, but comes with the concomitant risk of this being viewed negatively by foreign investors as the RBI’s remaining foreign exchange assets might not be enough to handle the next financial crisis. Further, it said that the domestic market is not big or deep enough to absorb such a large amount of government bonds.
The other option the RBI can opt for is that, instead of selling the government bonds, it could simply waive its rights over those bonds, thus reducing its asset holdings and reducing the government’s liabilities.
“This is a better way of doing it, markets don’t get disrupted and the government gets a fiscal benefit of lower outstanding debt to that extent,” the report said. “This second option though may not be palatable to the government.”