Home/ Opinion / Views/  The Centre must not become reliant on RBI payouts

Last week’s big bump-up in the Reserve Bank of India’s (RBI) annual dividend payout to the government would have pleased the Centre as it looks to squeeze every source of inflows to keep its heavy social and development expenditure going. RBI’s board approved the transfer of a 87,416 crore “surplus" for fiscal 2022-23. This is almost thrice the 30,307 crore it sent across the previous year. To the extent this money helps the government restrain its market borrowing, it will ease upward pressure on debt market yields and free bank credit for private productive purposes. Interestingly, RBI managed such a big payout despite raising the contingency risk buffer it must always maintain to 6% from 5.5%. This was enabled by currency-operation profits made on the back of heavy US dollar sales in support of the rupee’s exchange value. Its intent was to keep volatility in check, but it also gave our central bank a one-off bounty in a war-stricken year. Latest RBI data shows that it sold more dollars in 2022-23 than it bought, unlike the preceding two years. Its overall sales over the year exceeded its purchases of nearly $187.1 billion by a bit over $25.5 billion.

Currency movements explain why that was needed. The dollar gained against most other national currencies after Russia’s invasion of Ukraine and America’s interest rate hikes, both of which drew global investors to the relative safety of US Treasuries that had finally begun yielding more and offering better coupon rates. Even generally, dollar assets gained appeal. Outflows from India meant strong demand in rupees for dollars, and the rupee weakened by 8% from about 76 to the dollar at the start of 2022-23 to some 82 by year-end. Given that our currency’s average annual depreciation was about 3%, that was steep. As RBI’s managed-float policy requires it to minimize short-spurt volatility for the sake of macro stability, but not alter the conversion rate’s longer-term trend, the rupee’s slide lasted—with forex reserve sales aiming to smoothen it, that’s all. Since that stash had been accumulated over an extended span of large inflows, the dollars offloaded by RBI would have likely been bought at a time when the US greenback was far cheaper. In other words, an aberrative year generated an extraordinary bonus. As it is inflows that let us invest more than we save as a country, a repeat of such conditions is not to be wished for.

Broadly, the Indian economy seems to have weathered various post-covid pressures relatively well. Barring another shock, RBI might again be a net buyer of dollars this year as dollar demand for rupees recovers. This will hinge partly on how attractive local equity assets are. Last year saw foreign direct investment dip after a decade’s uprun, but they stayed above $70 billion. Also, the US Federal Reserve’s sharp rate incline looks likely to plateau soon, as could on-pause RBI’s, so the rate-gap effect will lose further force. What’s critical is that the Centre keeps its expectations of RBI payouts minimal. These must not be seen as a fiscal fix for stretched times. There must be no iota of pressure on the central bank to turn in profits. It’s good that its gains will aid the Centre’s fiscal balance, but RBI’s goals are too complex and crucial to risk distraction. A central bank with a large surplus does our economy a much smaller favour than one that holds our money’s real value steady and assures us broad macro stability on other fronts. We should focus on the basics of sustainable economic growth.

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Updated: 25 May 2023, 01:45 AM IST
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