Using reserves: When, if not now?

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Using reserves: When, if not now?

Read more on - Polity | Economy | Schemes | S&T | Environment


  • A disaster unfolding: Various parts of urban and rural India are undergoing a complete disaster, medically. Various solutions are being contemplated. This is the time to think of using the huge reserves with the RBI.
  • How to use RBI reserves: The problem today with India is the huge mismatch in the supplies of medical needs - oxygen oxygen cyliners and concentrators, make-shift hospitals, nursing homes and so on. Then of course, India needs vaccines in large quantities.
    1. India is troubled due to limited availability of urgently needed stuff
    2. India's inability is not that it lacks the resources to import huge quantities. RBI has the money. And government owns those reserves,eventually. So for the union govt. to leave matters solely to states is improper.
  • Reserves: What do "reserves" mean? In context of RBI's balance sheet, it can mean two things -
    1. The foreign exchange reserves are on the asset side of the balance sheet
    2. Capital reserves are an addition to the equity capital on the liabilities side of the balance sheet. 
    3. These reserves are built via accumulation of retained profits. These get reinvested by the RBI - in forex reserves and G-secs etc,
    4. Both kinds of reserves need to be used today.
  • Process of using reserves: First, the RBI must pay an extraordinary dividend to GoI. RBI's capital reserves will reduce, and GoI's cash balances with RBI will rise.
    1. GoI can spend these to get forex from RBI, and spend that on medical imports (on an urgent basis)
    2. What changes will come on RBI's balance sheet? The forex reserves will reduce (on asset side) and capital reserves will reduced (on liabilities side).
    3. Govt's cash balances with the RBI won't change, as they will rise and then fall. Other variables will change very little - bankers' deposits with RBI, currency, fiscal deficit, govt bonds held by RBI. So interest rates won't be affected. 
    4. Since both supply of, and demand for, foreign exchange rises, exchange rate won't change.
  • Data: RBI's forex reserves are more than $585 billion (May 2021). Short term extermal debt was just 17.7% of this, in Dec 2020. India can easily reduce the forex reserves now. It won't even be too huge a quantity needed.
  • Capital Reserves: The term used by RBI is "Other Liabilities and Provisions". These are reserves kept for prudence, because asset prices with RBI can fluctuate. That is actually not right, because the 'revaluation' of forex and gold held by RBI shows not just short-term rise in prices, but permanent appreciation (in rupee terms) of forex and gold held for a long time.
    1. These were Rs.15.61 trillion (June 2020). That's 28.4% of RBI's assets.
    2. It is 78 times the Budget of Central Vista, and 86 times the PLI scheme for battery storage. 
  • Summary: Reduce this "provisions" in RBI balance sheet, as cutting public expenditure elsewhere (Central Visat) is not possible. India will benefit tremendously with the medical supplies.
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!
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