How much equity capital should a central bank hold? Case of RBI

New paper by Ila Patnaik and Radhika Pandey of NIPFP:

The mechanism to calculate how much reserves the RBI transfers to the Central Government has been at the forefront of debate amongst experts and policy makers. The present legal framework allows the RBI to choose what proportion of reserves it transfers to the Government. As a consequence, it has built up reserves that are higher than most other central banks hold. This paper presents the logic for why central banks might hold reserves. Drawing on cross country practices, it presents a discussion of the possible arrangements for transfer of reserves to the Government. Any institutional arrangement to determine a framework for reserves transfer must consider these options.

One expects Bimal Jalan Committee to submit its report after election results. One expects the committee to advocate some rules for capital and reserve management of RBI..

One Response to “How much equity capital should a central bank hold? Case of RBI”

  1. RandomEconMuser Says:

    If govt and RBI ever come to the decision to transfer RBI’s capital to the govt, it will be interesting to see how they plan to disburse funds in the system. Based on what I can decipher from Rajan’s writings, he is concerned since RBI is mandated to maintain a particular level of monetary base, the additional funds injected in the system will be quickly absorbed by RBI, leaving the system unchanged.

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