RBI’s ₹1.76 trillion transfer to government to be balance sheet neutral
- RBI made a ₹1.23 trillion profit in 2018-19 helped by a ₹36,000 cr rise in income earned from OMOs
- The Jalan panel has recommended that RBI’s capital framework be reviewed every five years
Mumbai: The transfer of the Reserve Bank of India’s (RBI) surplus to the government will not require the central bank to sell assets and won’t shrink the size of its balance sheet, a person aware of the development said.
The person also said that finance secretary Rajiv Kumar, the government’s nominee on the Bimal Jalan committee, wanted RBI’s surplus, or the contingency risk buffer for monetary and financial stability, at 3% of its balance sheet, significantly lower than the panel’s final recommendation.
The risk buffer helps the central bank maintain India’s monetary and financial stability.
The Jalan committee decided to keep the buffer at 4.5-5.5% for monetary and financial stability risks and 1% for credit and operational risks. RBI’s realized equity, which is a form of contingency fund for meeting all risks, primarily built up from retained earnings, is now at 6.8% .
Following the central bank’s announcement of a ₹ 1.76 trillion surplus transfer to the government, there were concerns that RBI would have to sell assets to balance the money flowing out of its liabilities. RBI’s assets include government of India bonds, foreign exchange assets and gold.
Explaining the process, the person said, the money (surplus and excess capital) is at present part of the liability side of RBI’s balance sheet and would move to the government’s deposit parked with RBI, also part of the central bank’s liabilities.
“When the government draws the money from its account to spend, it will lead to an increase in currency in circulation in the economy. Since currency in circulation is also part of RBI’s liabilities, it would balance the outflow from the government’s account,” the person said.
According to the latest figures, as on 16 August the currency in circulation stood at ₹21.98 trillion, as against ₹19.42 trillion a year ago.
RBI agreed to transfer ₹1.76 trillion to the government this fiscal, the central bank said after a board meeting on Monday. The transfer includes ₹1.23 trillion of surplus for 2018-19 and ₹52,637 crore of excess provisions identified as per the revised economic capital framework adopted at the meeting, said RBI.
Meanwhile, the central bank has made annual profit in the range of ₹15,013-65,900 crore between 2010-11 and 2017-18 and the profit of ₹1.23 trillion in 2018-19 was substantially high. According to the person cited above, RBI made this whopping profit in 2018-19 owing to an increase of ₹36,000 crore in income earned from open market operations (OMOs) this year. Another component was that it earned ₹21,000 crore because it used a new methodology to value foreign exchange gains starting 2018-19. A clearer picture of RBI’s finances for 2018-19 will be available once it releases its annual report on Thursday.
India Ratings and Research said in a report on Wednesday that the surplus in banking system liquidity (approximately ₹1 trillion) has been driven by RBI’s continued OMOs, aggregating ₹3.5 trillion in the 12 months ended 31 July, the forex swap window that brought in approximately ₹70,000 crore of foreign capital.
“The ₹1.76 trillion surplus transfer by the Reserve Bank of India (RBI) to the central government is likely to provide some respite to the centre’s finances; however, a major portion of this amount is likely to be utilized in meeting revenue receipt shortfalls emanating from the weakening economic conditions,” the report said.
That apart, the Jalan panel has recommended that the central bank pay interim dividend to the government, a practice that started in 2016-17, only under exceptional circumstances.
All the recommendations of the panel, set up to study the central bank’s economic capital framework, were accepted by RBI’s central board on Monday.
The Jalan committee has also recommended that RBI’s capital framework be reviewed every five years and its accounting year (July-June) be aligned with the fiscal year that ends on 31 March.
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First Published:28 Aug 2019, 11:09 PM IST
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