The RBI Board reviewed the Jalan Committee’s recommendations earlier this month and decided to expand the contingent risk buffer (CRB) that the RBI must set aside to 4.5%-7.5% of its liabilities. The earlier range was 5.5% to 6.5%.The following piece argues why this change is both sensible and necessary.A SENSIBLE CHANGE
First, why is it a sensible change?Any dividend that the RBI gives to the government is a way of monetising the fiscal deficit, which means filling up the gap between the government’s income and expenditure by printing notes.Such monetisation of the fiscal deficit can be inflationary, with more money chasing the same amount of goods and services. Central banks, therefore, desist from very high dividends—i.e., money printing. Rather, they ensure the amount of money printed is linked to the growth and inflation in the economy.This is exactly what the expanded range of contingency reserves allows. The expanded range of 4.5% to 7.5% CRB allows RBI to increase dividend in years of low growth, so that government can stimulate the economy with more fiscal spending.Conversely, in years of high inflation and growth, the RBI can raise the CRB to 7.5% and thus decrease the dividend and prevent over-heating of the economy.Secondly, the current global financial set up also requires the RBI to have more flexibility.In the decade from 2009-2020, inflation in developed countries remained close to zero and hence rates were low. The global trade set up was also more predictable as countries charged each other most favoured nation (MFN) rates of tariff, and played to global rules set by the WTO.
We are now in the thick of global tariff wars and unilateral disbanding of trade and tariff rules. In short, global macros are bedevilled by uncertainty with little clarity on global growth, inflation, interest rates and currency trends.At such times, the RBIs balance sheet too will experience more rockiness with respect to income from investments in bonds or profits from depreciating currencies. Hence the need for more flexibility in setting reserves.NEED FOR CHANGING CRBLet’s turn to why it has become necessary for RBI to change the CRB ratio. The big reason is the need to find more ways to generate dividend for the government—which is profit booking by selling forex reserves—is drying up.Here’s the back story: Until 2019, the RBI used to revalue its forex reserves every month and hence it didn’t show any profit on sale of forex reserves.The Jalan committee on RBI balance sheet in 2019, recommended the RBI need not revalue its reserves. Hence, every time since 2019 when the RBI sold dollars, it made a profit, as the cost price would be the average historical cost of acquiring the forex reserves, while the sale price would be the dollar-rupee exchange rate of the day. This route helped RBI show more income. But it was an inherently short term income source.From FY20-FY22, the average profit that RBI made by selling a dollar was around ₹15-16. But by FY23, it has fallen to ₹8, and in FY25, RBI made only ₹6.5 per dollar sold. This is because the historical average acquisition price is rising as the RBI sells and books profit.Going forward, the RBI profit per dollar sold may drop to as low as ₹1-2. Hence the RBI Board may have, in its wisdom wanted to ensure a way by which the dividend doesn’t fall sharply but can be smoothened. The power to keep the CBR as low as 4.5% or as high as 7.5% allows precisely that.This year, RBI has garnered a cool ₹2.5-2.6 lakh crore by selling nearly $400 billion through the year. And so the board has kept the CRB high at 7.5%.In FY26, if the profit from dollar sales falls, the RBI will have the flexibility to lower the CRB to say 6.5% and thus declare higher income and dividend to government.Of course, even this is a limited source of income. But then central banks are not supposed to be sources of income for governments.The RBI surplus, as noted earlier, is a deficit monetisation tool, and can be inflationary. Hence, it would be wise to keep it linked to the country’s GDP growth rate. Going by recent experience, no more than 0.5-0.75% of the GDP.
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