According to analysts at ANZ, the contentious issue of the quantum of the Reserve Bank of India’s (RBI) excess reserves to be transferred to the government is once again in the spotlight.
Key Quotes
“The consultative committee group led by ex-RBI Governor Bimal Jalan is due to present its recommendations in the next few weeks.”
“The RBI needs reserves to manage market risk arising from changes in the valuation of its holdings of domestic and foreign currency assets and to support its intervention operations.”
“However, both from an international and local perspective, the RBI appears to be holding reserves in excess of what is needed to manage the underlying risks.”
“A transfer of reserves via a special dividend is feasible. This however, does not mean that the government can use these reserves for any purpose. Uses other than recapitalising banks or retiring public debt will have monetary and potentially inflationary consequences.”
“A well-defined legal framework on the transfer of reserves would go a long way in giving confidence to financial market participants over the independence and autonomy of the central bank.”
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