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Why the Government shouldn't insist on RBI to part with its Contingency Fund?

Why the Government shouldn't insist on RBI to part with its Contingency Fund?

The government is in talks with RBI for transferring Rs 13, 140 crore which the bank had transferred to its contingency fund this year. The RBI paid a reduced dividend of Rs 30,659 crore in 2016-17 whereas the Union Budget had projected Rs 74,901 crore this year.

The government is in talks with RBI for transferring Rs 13, 140 crore which the bank had transferred to its contingency fund this year. The RBI paid a reduced dividend of Rs 30,659 crore in 2016-17 whereas the Union Budget had projected Rs 74,901 crore this year. In 2015-16, the RBI transferred a surplus of Rs 65,876 crore to government. Here go some of the reasons why the government is not setting the right precedent by asking RBI to part with its contingency fund money.

i) Accept that surpluses are actually lower this year because of demonetization and other costs

RBI hasn't earned more surplus this year because of the cost of demonetization especially printing of new notes, logistics etc. The RBI's expenditure almost doubled from Rs 14,990 crore in 2015-16 to Rs 31,155 crore in 2016-17. As a result, the net disposable income was only Rs 30,663 crore, down from Rs 65,880 crore in 2015-16. As done in the past, RBI transferred the entire surplus of Rs 30,000 crore plus to government.

ii) No major transfer to Contingency Fund after 2012-13

RBI maintains a contingency fund for meeting any losses arising out of carrying out the monetary and foreign exchange operations. There hasn't been any fresh additions to the contingency fund in the last three years. It is a good prudent practice to transfer a part of the surpluses to contingency fund as well as asset development fund. This year, the RBI included Rs 13,140 crore as a transfer to contingency fund. In a volatile global environment post 2008, the focus should be to build a robust contingency and asset development fund to meet any future shocks.

iii) Size of the Contingency Fund is not growing at all

The size of the contingency fund is almost stable in the last 5 years. The fund, which was Rs 2.21 lakh crore in 2012-13, currently stands at Rs 2.28 lakh crore. The contingency fund and asset development fund combined together represent 7.6 per cent of the RBI's total assets. This ratio was over 10 per cent in 2012-13. Higher the ratio, better it is for the country.

iv) Meeting any future contingent liabilities

Contingency fund provides a cushion for meeting any contingent liabilities. Contingent liabilities stands at Rs 1,10,705 crore as on June 30, 2017. The contingent liabilities have jumped big time in the last two years because of exposure of RBI in forwards and swaps. The share of forwards and swaps was Rs 1,10,579 crore. This was done to allow banks raise foreign currency deposits to protect the rupee value in the period after September 2013. Many say such a situation on the currency front can come anytime in future when we have to raise dollar deposits to protect the rupee value against US dollar.

v) Special Responsibility on RBI's shoulders

The central bank of the country has a special responsibility as a banker to the nation. It has multiple responsibilities. Take for instance, the entire demonetization exercise was an additional responsibility where the RBI incurred a huge cost. The cost of printing of new notes was alone Rs 7,965 crore. There was additional cost of transportation, logistics, managing old notes etc. The RBI also used special aircrafts to transport notes so that banks can reach out to every nook and corner of the country.