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What Is The Relevance Of Bimal Jalan Committee Recommendation For Indian Economy?

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What Is The Relevance Of Bimal Jalan Committee Recommendation For Indian Economy?
Rajat Mishra - 22 July 2019

The Bimal Jalan Panel that was constituted by the RBI in December under former RBI governor Bimal Jalan to review the economic capital framework of the RBI, has recommended transfer of surplus reserves to the government in tranches over three-five years.

The RBI Annual Report 2017 says that the RBI has contingency reserves of C 2.4 lakh crore, revaluation reserves of C 6.9 lakh crore and other reserves of C 1.1 lakh crore forming a total reserve of C 10.4 lakh crore. While the currency and gold revaluation reserves of RBI have more than tripled to C 6.92 trillion in 2017-2018 from C 1.99 trillion in 2008-2009, the contingency fund has grown by 50 per cent during the same periods to C 2.32 trillion.

That bulk of this comprises revaluation reserves that contain gold and currency revaluation. As RBI has bought gold in prior years, when it was cheaper at around C 2000 and C 5000 and today the value of the gold is C 33,000 and the difference is revaluation, which is a notional gain for RBI. The RBI has probably bought dollars in the past years when dollar was probably C 39- 45 and today the cost of the dollar is almost C 68. That difference is again a notional gain.

How does RBI make profit?

The RBI makes profit from printing money. The other way in which the RBI makes money is by repo rate that is the interest rate, it charges when it lends to banks. That also adds to RBI profit.

What does it do with the money?

First, it fulfils the establishment expenses, pays salary, expenses to maintain RBI. After every year it deducts that money, the balance is usually transferred to the government as surplus or as dividends. That also is a money creation.

Can it go on buying bonds from the government or giving dividend to the Government?

No, The RBI’s creation of money in any year is usually limited by the nominal GDP growth in the economy. Suppose, if there are 100 goods in the system and there are C 100, next year if the economy is growing at 7 per cent, seven more goods are added. The RBI creates C seven in terms of money creation. And then a little more is added for inflation.

If the Bimal Jalan Committee says that the excess capital should be transferred that does not mean that the government has suddenly become rich. To the extent of the money that has been transferred the RBI has to do less open market operations and buy less dollars and bonds. If it creates much more, give excessive dividends, as well as does excessive intervention, then it would have created too much money and much money chasing few goods will lead to general rise in inflation.

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