Drawing excess capital funds from RBI won’t hit India’s ratings

Drawing excess capital funds from RBI won’t hit India’s ratings

BofA Merrill Lynch said that the RBI Act permits transfer of past excess reserves.

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KOLKATA: Drawing excess capital funds from Reserve Bank of India (RBI) will not impact India’s ratings, which depend on the depth of foreign exchange reserves rather than the central bank’s internal reserves, said BofA Merrill Lynch.

The excess capital at RBI that can be transferred to the government is estimated at Rs 1-3 lakh crore, or 0.5-1.5 per cent of India’s gross domestic product, a research report prepared by the firm said.

The Bimal Jalan committee has reviewed RBI’s economic capital framework and RBI is expected to make the recommendations public this month. “We actually welcome the use of excess RBI capital to recapitalise public sector banks to support recovery,” the BofA Merrill Lynch report said.

BofA Merrill Lynch said that the RBI Act permits transfer of past excess reserves.

“There is no bar as long as the RBI maintains Rs 5 crore of reserve fund under Section 46. While Section 47 enjoins the RBI to credit its annual surplus to the government, after provisions, it does not place any restriction on further transfers,” said Indranil Sen Gupta, senior economist at the firm. He said that RBI can transfer excess reserves to the ministry of finance without selling government securities or foreign exchanges.

“It can monetise net worth as the creator of money. Monies will be transferred to the government’s balances with the RBI. They will then convert to currency on public spend,” Sen Gupta said. Bank recapitalisation using RBI’s excess capital will be liquidity-neutral and the central bank will not have to use its g-sec portfolio to sterilise liquidity from the system.

Source- Economic Times.

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