"The attempted raid on the statutory reserves of the Indian central bank to meet the fiscal requirements of the government is being justified with two arguments—that the Reserve Bank of India (RBI) has no business to expect independence from the sovereign and that it anyway holds excess statutory reserves compared to peers. Neither argument is factually wrong. The nuances are ignored, however. More on that a little later in this column.
Capital is the buffer a central bank maintains to absorb losses. The RBI maintains statutory reserves to guard against two main risks.
It has a currency and gold revaluation account for protection against exchange rate movements as well as changes in global gold prices. It has a contingency fund as insurance for a rainy day. The former is determined by formal accounting rules. The latter is a more flexible number. The latest available RBI balance sheet shows that there is ₹6.9 trillion in the revaluation account and ₹2.3 trillion in the contingency fund."
Read the full article here.