The then Finance Minsiter, Arun Jaitley, on December 18, 2018, at a public function had said, “I don’t need these funds for fiscal deficit, or government expenditure for this year till the month of May… I don’t need even one rupee."

Jaitley had refuted when questioned about using the RBI surplus funds to meet its deficit targets. He said the money will be used for recapitalising the banks, adding, “it could be used for the poor of the country. The government doesn’t use it for paying salaries.” 

But after the news of the gargantuan transfer of a record Rs 1.76 lakh crore to the Centre yesterday, there is a growing voice all around that the Govt will be using the money to contain its fiscal deficit and it will not benefit the poor. Some analysts say that around Rs.20,000 crore could be used for bank recapitalization but major portion of the surplus could be used towards the fiscal deficit.

Fiscal deficit in simple language is a situation when Govt expenditure exceeds the income generated. We all know that the tax collections are way below what was targeted and thus citing recessionary trends and slowdown, the Govt might end up using this money for fiscal deficit after all.

Using it towards fiscal deficit is not a good move as no central bank, anywhere in the world uses the surplus for this purpose. It is like dipping into the contingency savings now because you ended up spending more than what you earned; because your math went haywire, the RBI is being raided.

There is nothing wrong in using the surplus as central banks all over the world do it and as long as the RBI is sufficiently capitalized and as long as the funds do not come from the revaluation reserve. The revaluation reserve includes periodic marked-to-market unrealized/notional gains/losses in values of foreign currencies and gold, foreign securities and rupee securities, and a contingency fund.

The transfer of this surplus is neither making the RBI vulnerable nor has it taken away so much money that RBI is left with little to douse a fire if a crisis comes calling. The Govt was eyeing the huge pot of unrealized gains of over Rs.9 .6 lakh crore - cited as currency and gold revaluation reserves in the RBI’s balance sheet. The Jalan Committee was right in not touching these unrealized gains as that would have exposed RBI’s 70% reserves.  And what did come as a surprise was that the entire surplus will be transferred in one shot and not in a staggered manner.

The Govt should ideally use this surplus to reduce the balance sheet and off-balance sheet borrowings and this would mean recapitalization bonds issued for PSU banks and borrowings by the Food Corporation of India from the small savings fund.

Well, we do not live in an ideal world and the money in all likelihood will go towards fiscal deficit as that is the lone economic figure which the FIIs look at before investing in India.  And like always, me and you have no say in most matters of the Govt.