The Reserve Bank of India (RBI), in its annual report of 2006-07, reported that its earnings from the deployment of foreign currency assets and gold jumped by 43%, up to Rs35,153 crore from Rs24,538 crore through 30 June.
The sharp increase stemmed from a “hardening of global short-term interest rates,” according to the bank’s report.
Market participants and economists point out that some of the gains could have also been on account of changes in exchange rates. This means that there was significant accretion to the foreign exchange reserves because of the dollar weakening against other currencies.
Says Gaurav Kapur, senior economist at ABN Amro Bank: “At least a bulk of the forex reserves accretion was on account of the weakening dollar in the last year.” Sandeep Bhandari, global market head at Standard Chartered Bank, said that because of the frequent interventions by RBI to shore up the rupee, it had made “unintentional gains during the year”.
However, there are others, such as Indranil Pan, senior economist at Kotak Mahindra Bank Ltd, who argue that the significant increase can be attributed to the fact that for most of the year, the central bank was reaping benefits from deploying a large part of its assets in the US treasuries. “In 2006-07, it is unlikely that the central bank moved away from the safe haven of the US treasury at least until (the first) half (of) the year. Also, because most Indian exports are marked to the US dollar, it is likely that RBI has deployed money in the US treasury and made gains from it,” he said.
RBI’s gross income during the year was Rs75,348 crore, which includes Rs34,308.60 crore on account of profit from the transfer of shares of State Bank of India to the central government. The Narsimham Committee II on banking sector reforms had recommended that RBI should not own the institutions it regulates. Accordingly, 31.43 crore shares of SBI was transferred from the central bank to the government at Rs1,130.35 a share.
The income of RBI excluding SBI profits was Rs41,039.73 crore, an increase of 55.9% over the previous year. Apart from the increase in income from foreign sources, the domestic sources of income also increased on account of “lower provisioning for depreciation of securities held in bank’s portfolio,” the report said.
The balance sheet of the central bank also shows a drastic increase in the deposits of scheduled commercial banks. The deposit base of scheduled commercial banks in India has nearly doubled from Rs1.26 trillion to Rs2.06 trillion during the year 2006-07. Said Partha Mukherji, head of treasury operations at Axis Bank Ltd: “Bank deposits looked a lot more attractive in 2006-07. People shied away from investing in mutual funds and equities and ploughed back money in bank deposits during the year, due to uncertainties in the equity markets.”