In absolute terms, RBI’s contingency reserves were Rs 2.321 lakh crore in FY18 as against the total assets of Rs 36.17 lakh crore.

An analysis of the annual reports of the Reserve Bank of India (RBI) shows that at 5.5 percent, the central bank’s contingency fund (CF) reserves are presently at the lowest level in at least 19 years. The RBI chose the lower band of the 5.5-6.5 percent range proposed by the Bimal Jalan-led expert panel for the purpose of computing the amount of surplus that needs to be transferred to the government as per the revised Economic Capital Framework (ECF). It was based on this formula, the RBI decided to transfer Rs 1.76 lakh crore extra capital to the government, out of which Rs 52,637 crore was additional money as per the revised ECF.

RBI’s contingency fund or realised equity level was at 9 percent during the fiscal year 2001. This rose to double-digit figures in the next two years. During the FY09 or the period of the global financial crisis post the collapse of Lehman Brothers, it rose to the highest level of 10.9 percent (at least in 19 years). This fell to 10.2 percent in the subsequent year that is FY10. In the subsequent years, the contingency reserves kept falling. It stood at 6.8 percent in FY19. In FY18, this figure was 6.4 percent. In absolute terms, RBI’s contingency reserves were Rs 2.321 lakh crore in FY18 as against the total assets of Rs 36.17 lakh crore.

There are multiple components to the RBI’s reserves. Currency and gold revaluation account (CGRA), the investment revaluation account, the asset development fund (ADF) and the contingency fund (CF).

The RBI keeps a good part of the profit in CF. Investments in gold and currencies are part of the unrealised reserves where value fluctuates based on the revaluation of underlying assets. The Jalan panel has left the unrealised reserves untouched.

The RBI maintains contingency reserves for use in the event of extreme financial crisis situations when the economy and currency markets collapse and governments are no longer in a position to manage the economic situation.

The Jalan panel, while suggesting the desired 5.5-6.5 percent band, said at the upper band, there will be an excess of risk provisioning to the extent of Rs 11,608 crore and at the lower band, Rs 52,637 crore at the lower bound of the band. The RBI’s central board decided to maintain the realised equity level at 5.5 percent of the balance sheet and the resultant excess risk provisions of Rs 52,637 crore were made available to transfer to the government.

The government can use the windfall gain from the RBI either to cut its off-Budget borrowings or to use for spending boost likely in the infrastructure sector. If that happens, it will be good news for the economy because this will be nothing short of a stimulus. On Tuesday, Finance Minister Nirmala Sitharaman hinted that the government is yet to decide about the use of the RBI money. That means it could be even used for meeting an expected revenue shortfall and cut off-Budget borrowing.

In its report, the Jalan panel had said that the ECF framework may be periodically reviewed every five years. Nevertheless, if there is a significant change in the RBI's risks and operating environment, an intermediate review may be considered, the report said. Also, the committee has recommended a surplus distribution policy which targets not only the total economic capital (as per the extant framework) but also the realised equity level of the RBI's capital.

"This will help bring about greater stability of surplus transfer to the government, with the quantum of the latter depending on balance sheet dynamics as well as the risk equity positioning by the central board," the panel said.

(Kishor Kadam contributed to this story)