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RBI to Transfer Rs 1,76,051 Crore to Government

Out of this total sum, an amount of Rs 28,000 crore has already been paid as interim dividend and already been accounted by the budget

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RBI, security, finance, market
This is broken as Rs 1,23,414 crore as surplus for year 2018-19 and another Rs 52,637 crore of excess provisions identified by the committee as per the revised Economic Capital Framework. Pixabay

The RBI board accepted the recommendations of the Bimal Jalan committee and has decided to transfer Rs 1,76,051 crore to the government. This is broken as Rs 1,23,414 crore as surplus for year 2018-19 and another Rs 52,637 crore of excess provisions identified by the committee as per the revised Economic Capital Framework (ECF).

Out of this total sum, an amount of Rs 28,000 crore has already been paid as interim dividend and already been accounted by the budget in the previous financial year. The difference in accounting is owing to the Reserve Bank of India (RBI) not following the conventional financial year of April-March thus far.

The following implications are noteworthy from a macro and markets perspective, in our view:
1. The net liquidity injection from the RBI as a result of this exercise will amount to Rs 1,48,051 crore (Rs 1,76,051 crore minus Rs 28,000 crore already paid). This is against an expectation of normal budgeted dividend of Rs 90,000 crore (assumed RBI dividend component of the Rs 1,06,042 crore budget number). We have done a forward liquidity assessment for the rest of the year in a recent note (https://www.idfcmf.com/insights/money-creation-to-pick-up-pace-an-rbi-update/).

RBI, Government, Board
The RBI board accepted the recommendations of the Bimal Jalan committee and has decided to transfer Rs 1,76,051 crore to the government. Pixabay

This is now updated for approximately Rs 58,000 crore of excess transfer and still leaves open market operations (OMO) purchase of bonds in play from the RBI. However, these will now probably shift to the January-March quarter and will be of a smaller amount than earlier assumed.

2. From a budget standpoint, the extra ‘windfall’ owing to the Jalan committee is Rs 58,000 crore. Given the expected revenue shortfalls in a slowing economy and especially vis-a-vis the aggressive assumptions in the budget, it would be prudent to keep this amount in order to meet the budget numbers more credibly. So far, any hope of meeting the budget targets rests on a similar expenditure compression as that undertaken last year, including via moving some items of spending ‘below the line’. Any temptation to use this amount towards a ‘fiscal stimulus’ risks regenerating worries around the quality and effectiveness towards meeting the deficit targets.

3. As pointed out by a friend of ours, the new formula for distributing future dividends potentially imposes a constraint on the quantum of such distributions. The committee has recommended ‘realized equity’ to be 6.5 to 5.5 per cent of balance sheet. It has recommended taking this to lower bound and transferring the entire excess of Rs 52,637 crore so created. Further, as per the suggested surplus distribution policy, only if realized equity is above its requirement will the entire net income be transferable to the government. If it is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the government.

Within the range of contingent risk buffer (CRB), that is, 6.5 to 5.5 per cent of the balance sheet, the Central Board will decide on the level of risk provisioning. Given that provisioning is now at lower bound, future dividend transfer decisions will have to account for increasing the size of realized equity in line with the RBI’s growing balance sheet, before such pay outs can be made. This implies that such transfers are unlikely to match the substantial jump that has been recorded in the current year.

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Conclusion:
Overall, the identified ‘excess’ transferable capital by the Jalan committee is only just above Rs 50,000 crore, far below the hopeful bounties being talked about. Not just that, future pay-outs are now formula driven and subject to some constraints with respect to the maintenance of a minimum CRB. However, we believe, this disappointment is blunted owing to a much higher than expected normal dividend transfer for the current year which, if used judiciously, can be invaluable in making the budget math sound more credible.

Overall though, the recommendations and their acceptance by the RBI lend credibility to India’s overall policy frameworks and institutions, especially given the history with respect to this particular debate around RBI capital. From a market standpoint, the net additional amounts involved here at just under 0.3 per cent of GDP do not really move the underlying narrative, which remains bullish for quality interest rates. (IANS)

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Devendra Fadnavis Sworn-in as Maharashtra Chief Minister, Ajit Pawar as Deputy Chief Minister

BJP leader Devendra Fadnavis as the new Chief Minister of Maharashtra & Congress Party leader Ajit Pawar as the new Deputy Chief Minister

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Chief Minister of Maharashtra taking oath
Hon Governor Bhagat Singh Koshyari administered the oath of Chief Minister of Maharashtra to Shri Devendra Fadnavis and Deputy CM to Shri Ajit Pawar.

In a stunning political development, Maharashtra Governor B.S. Koshyari on Saturday morning administered the oath of office to Bharatiya Janata Party leader Devendra Fadnavis as the new Chief Minister of Maharashtra and Nationalist Congress Party leader Ajit Pawar as the new Deputy Chief Minister.

The two were sworn-in at a function in the Raj Bhavan held around 8 a.m. in the presence of a few BJP and NCP leaders, and other government officials.

Soon afterwards, Fadnavis said that the Governor would give them a letter instructing when to prove the new government’s majority on the floor of the Assembly.

He added that the cabinet would be expanded at a later date.

Prime Minister Narendra Modi has conveyed his best wishes to Fadnavis for taking over as the CM for a second consecutive term, and to Pawar on his appointment as Dy.CM.

A letter was issued from Union Home Ministry simultaneously that said that President’s Rule was lifted from Maharashtra.

Chief Minister of Maharashtra Shri Devendra Fadnavis
Chief Minister of Maharashtra Shri Devendra Fadnavis taking oath.

Speaking to the media, Fadnavis said that after the elections, the Shiv Sena which had secured a clear majority in alliance with BJP rejected the public mandate and was engaged in forming the government with some other parties necessitating President’s Rule in Maharashtra.

Since it did not appear possible for those three parties to form a ‘khichdi’ (hotch-potch’) government and in order to provide a stable government to the state the decision was taken.

“Along with Ajit Pawar and support of others, we submitted a list to the Governor who discussed the issue with the centre to conclude that a viable government could be formed,” Fadnavis said.

Accordingly, after discussing with the Centre, the Governor invited Fadnavis and Pawar to form the government which was sworn-in.

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On his part, Ajit Pawar said that giving the state a stable government was the need of the hour which did not appear to be happening.

“I was tired of the continuous negotiations going on and so decided to go with Fadnavis and give a stable government to the state,” Pawar said. (IANS)