Uncluttering the Clutter
Counter Point: VK Sharma, Former executive director, Reserve Bank of India

Why currency and gold revaluation account and investment revaluation account credit balances shown as part of the capital and reserves on the RBI’s balance sheet cannot be transferred to Government of India

These reserves are nothing but revaluation reserves which represent periodic marked to market unrealised gains/losses in the value of assets on the RBI’s balance sheet and currently add up to about Rs 7 trillion on RBI’s total assets of about Rs 36 trillion, constituting about 20 per cent of total assets. The other component of RBI’s capital and reserves of Rs 2.5 trillion, constituting about 7 per cent of total assets, comprise equity capital and contingency fund arising from interest income. Thus the total capital and reserves add up to about Rs 9.5 trillion constituting 27 per cent of total assets on RBI’s balance sheet. As regards the first component, namely, revaluation reserves of Rs 7 trillion, the only way it can be transferred to government is by actually selling the Rs 33.5 trillion (Rs 36t-Rs2.5t) worth of RBI’s assets, and that too, if and only if, the value of assets being sold does not go down, which it definitely will, given the sheer size of the assets (93 per cent of its total assets) on sale! Even if we assume for the sake of argument that it doesn’t, and will not, go down, this will still result in the massive collapse/ shrinking/contraction of RBI’s balance sheet, and, therefore, equally also of the high powered reserve/base money and the matching collapse/ shrinking/ contraction in the broader money supply M3, delivering the catastrophic and cataclysmic shock, bordering on a veritable financial and economic nuclear winter, to the real economy within no time with the matching collapse in output and employment due to involuntarily resulting exceptionally high interest rates!

The other component worth Rs 2.5 trillion can of course be transferred but at the cost of making of RBI’s core Tier 1 capital to assets ratio zero!

— The article is available in the author’s blog