Transfer of RBI revaluation reserves can give deflationary shock to economy

Such a transfer can deliver an unintended cataclysmic deflationary shock to the real economy, driving interest rates way too high, and leading to a massive collapse in output and employment

Recent events suggest that the RBI and the government may be going through some trouble in their relationship. At the heart of this tussle is said to be the government's insistence on transferring revaluation reserves worth Rs 3.6 trillion from the RBI to the government.

Let's take a closer look at how such a transfer can affect the economy

The capital and reserves that the RBI holds on its balance sheet consist of two main components, namely, Currency and Gold Revaluation Account (CGRA) and Contingency Fund. These reserves are nothing but only revaluation reserves which represent periodic marked-to-market unrealised gains/losses