RBI To Transfer Rs 99,122-Crore Surplus To Government 

The RBI’s transfer is large this year due to higher earnings from market operations.

<div class="paragraphs"><p>RBI Building. (Photo: BloombergQuint).</p></div>
RBI Building. (Photo: BloombergQuint).

The Reserve Bank of India will transfer a surplus of Rs 99,122 crore to the government for the nine months ended March 31, 2021, the central bank said in a press release on Friday. The larger-than-expected surplus, economists said, may have partly resulted from a recent change in the central bank’s accounting policy for forex gains.

The surplus was decided on while holding the contingency risk buffer at 5.5%, the RBI said after a meeting of the central bank. The RBI is transitioning to an April-March accounting year from FY22 and hence it has reported the surplus for a nine month period.

The board also approved the transfer of Rs 99,122 crore as surplus to the central government for the accounting period of nine months ended March 31, 2021 (July 2020-March 2021), while deciding to maintain the contingency risk buffer at 5.50%.
RBI Release

The surplus transfer is the highest since 2018-19, when the central bank had transferred Rs 1.75 lakh crore, which included a one-time payout on account of a change in the RBI’s Economic Capital Framework. Under the new framework, the RBI is required to maintain a contingency risk buffer of 5.5-6.5% of its balance sheet. The central bank has chosen to maintain the lowest required buffer.

The central bank’s annual report, which details its expenses and earnings for the year, is yet to be released.

What Could Have Led To Higher Surplus?

In FY21, the RBI would have earned income from a larger amount of open market operations as bond purchases by the central bank raises the amount of interest it earns. Larger foreign exchange reserves also add to its earnings. Liquidity operations conducted by the central bank also added to the earnings.

A larger balancesheet, both due to domestic bond purchases and higher forex reserves, would contribute to higher earnings and a larger surplus. In addition, liquidity operations such as the targeted long term repo operations would also add to the central bank’s earnings. A wider spread between the reverse repo rate (which the RBI pays banks who park funds with it) and the repo rate (at which banks borrow from the RBI) would also be a factor in this year’s surplus.
Soumyajit Niyogi, Associate Director, India Ratings

Since March 2020, the RBI has taken a number of steps to ensure orderly functioning of the markets. It has announced special liquidity operations, bought government bonds and reduced the benchmark repo and reverse repo rates. The former is currently at 4% while the latter is at 3.35%.

Simultaneously sales and purchases of government bonds, under what is widely referred to as ‘Operation Twist’, would also mean that the central banks was selling lower yielding short term securities while buying longer term higher yielding bonds, Niyogi said.

In addition, the surge in global liquidity meant that India’s foreign exchange reserves have risen to $577 billion as of March 2021.

Forex Gains: Key Behind The Higher Surplus?

The central bank would have also seen some benefit from a change in accounting treatment on sales of foreign exchange.

Starting FY19, the RBI decided, on the recommendation of committees that had looked into the matter, that any sales of foreign currency would be compared with the weighted average holding cost of the currency, and this difference is taken to the RBI’s income statement as realised profit (or loss). Until then, the central bank would compare any sales to the weekly revaluation rate, leaving little in terms of profit or loss to be transferred.

In a note dated May 18, ahead of the surplus announcement, Ananth Narayan, senior India analyst at the Observatory Group, wrote that he expects a transfer of close to Rs 1 lakh crore “on the back of recognition of foreign currency revaluation gains.”

The RBI has gross sold a record $ 85.2 billion and gross purchased $140.5 billion for a net sale of $55.3 billion in the truncated fiscal year. “While there is considerable opacity around RBI forex accounting, we believe the record high gross U.S. dollar sales during 2020-21 could help the RBI recognise some of currency and gold revaluation (reserves) account (CGRA) into the P&L,” Narayan wrote.

In FY21 (July to March), RBI’s gross dollar sales in spot market rose to $85 billion vs $28.7 billion in FY20. Under its Economic Capital Framework introduced in 2019, the accounting practice of forex operations was changed to historical cost vs earlier practice of week-to-week cost. Hence, the large quantum of dollar sale and historical cost accounting practice would result in large gains in foreign exchange transactions.
Gaura Sen Gupta, IDFC FIRST Bank Economics Research

Rahul Bajoria, chief India economist at Barclays, shared that view.

“In our view, the upside surprise could have been driven by increased returns from domestic assets and changes in accounting practices by the central bank — the RBI recently allowed itself to book profits on its forex transactions from a weighted average cost perspective,” Bajoria said. “Our estimates show that this move could have helped the central bank boost yields on its foreign asset holdings. Further, increased holdings of domestic government securities likely further amplified the central bank’s income for the year.”

How Rupee Swings Impact The RBI’s Dividend To The Government

Higher Than Budgeted

The higher transfer will come to the aid of government finances. In the budget presentation in February, the Union Government had budgeted for Rs 53,511 crore as surplus transfer from the RBI.

The amount of surplus to be transferred by the RBI to the Government of India is considerably higher than the budgeted level. This will offer a buffer to absorb the losses in indirect tax revenues that are anticipated in May-June 2021, related to the impact of the now widespread state lockdowns on the level of consumption on discretionary items and contact-intensive services.
Aditi Nayar, Chief Economist, ICRA

Moreover, high commodity prices at a time when demand and pricing power are subdued, would dent the margins of corporates in many sectors, compressing the growth in direct tax collections, said Nayar.