We believe that as a result of the Jalan Committee Recommendations, the currency in circulation (CIC) entry on the RBI’s balance sheet will increase from Rs. 21.6 lakh crore to Rs. 23 lakh crore. This will happen because the quantum of Rs. 1.48 lakh crore will be recorded under CIC instead of the economic capital (contingency fund and revaluation balances).

Some portion of this new M1 will find its way into the system and add to liquidity, alleviating the supply side concerns further. The money will be transferred to the Union Government of India as a onetime transfer as the optimized balance sheet may not yield similar quantum in the short to medium term. RBI’s regular dividend payments on an annual basis will however continue and will be calculated based on the expected shortfall approach, which in turn will assess the central bank’s market risk.

The Government of India Windfall

We expect that the Government of India will gain Rs. 1.48 lakh crore under the Interest Receipts, Dividends and Profits entry on the revenue account – (receipts) side of the consolidated fund of India. As a result, the sub-entry of Dividend and Profits will increase to Rs. 2.21 lakh crore as compared to the budget estimate of Rs. 1.63 lakh crore. The quantum gained will have a direct bearing over the Revenue Deficit, which will come down to Rs. 4.27 lakh crore from the budget estimate of Rs. 4.85 lakh crore – a decline of almost 12%. We expect the incremental windfall to be spent on capex, primarily infrastructure and provide a booster shot to the ailing investment, consumption cycle.

Dissection of the Committee’s Recommendation

The committee is with the view that the RBI’s current contingency fund, which has been called as the Realized Equity should be within the range 6.5%-5.5% of the balance sheet. This was inferred via expected shortfall calculations under stressed conditions in order to assess the RBI’s market risk. The committee fund that the RBI’s current provisioning under this entry on the liability side of the balance sheet comes to 6.8%. In its assessment, the committee recommended the contingency risk at 5.5% of the balance sheet – hence allowing the transfer of Rs. 52,637 crores to the Government of India as excess risk provisions.

While assessing the revaluation balances, within the economic capital framework, the committee was with the view that any surpluses in this regard cannot be used for meeting any shortfalls in provisions. According to the committee, the revaluation balances can be termed as unrealized valuation gains and can be best treated as risk buffers. Therefore, these balances are non-distributable by virtue and cannot be transferred to the contingency fund for meeting obligations at any time.

Under the revised framework, the committee recommended a range of 20%-24.5% of the RBI’s balance sheet for revaluation balances (as part of the economic capital). Given the current provision being 23.3%, the committee allowed the transfer of excess provisions under this head to the Government of India – taking the lower bound of the range. This will result in the transfer of Rs. 1.23 lakh crore under this head to the Government as onetime payment. Since, as interim dividend payment, Rs. 28,000 crores have been already paid, the final quantum under this head will come to Rs. 95,000 crores.