Making sense of RBI's capital buffers and dividends
In the ongoing Indian government bond market soap opera, one subplot relates to RBI’s dividend payment to the government. After three years of paying out all of its net income as dividend, for fiscal year 2016-17 (FY17), the RBI board retained INR 131.9B of its income for its own books. Given current fiscal stress, this led to murmurs, including suggestions that RBI should now pay an ad-hoc dividend to the government. Any hasty roll back of this kind, without debate and consensus, would severely risk RBI’s credibility. That said, we do need to debate the appropriate level of capital buffers on RBI’s balance sheet. There has been work done on this – by the Subrahmanyam Group (1997), Usha Thorat Group (2004) and the Malegam Committee (2013). More needs to be done. Central Bank balance sheets and income statements can be tricky to grasp. In addition, this issue can excite touchy, ideological arguments about government credibility and RBI independence. This is not th...