The lender’s note comes as the panel led by former central bank Governor Bimal Jalan prepares to submit its report in the coming weeks.
Monday 22, April 2019
(Bloomberg) – The Bank of America Merrill Lynch (BofAML) said that a panel named by India’s central bank to study its capital structure is likely to identify excess reserves of up to INR 3 trillion ($43 billion) or 1.5 per cent of gross domestic product (GDP).
The view from BofAML lends itself to a debate over Reserve Bank of India’s (RBI) reserves, with one school of thought believing that the monetary authority holds surplus capital that can be handed over to the government and the other saying the RBI has insufficient reserves.
While finance ministry officials have supported transfer of surplus reserves to help the government meet budget goals, a central bank-backed think-tank found that the RBI’s capital buffer that is below the global average capital to asset ratio.
“Our stress tests throw up a range of one trillion rupees plus only from contingency reserves,” Indranil Sen Gupta, Chief India Economist at BofAML, said.
India’s central bank maintains higher contingency reserves as a percentage of its total book compared to its peers in Brazil, Russia and South Africa and a lower cap will release more funds.As such, if the cap is halved to 3.3 per cent from 6.3 per cent, currently, that will release INR 1.3 trillion, added Sen Gupta.
Sen Gupta said that along with revaluation gains which range from INR 3 billion rupees to INR 1.8 trillion, India’s central bank would be in a position to transfer the excess reserves to the government which can be used to recapitalise the country’s struggling state-run banks.
India’s central bank books revaluation gains on the foreign currency assets and gold holdings and the holdings are estimated just above $400 billion.