RBI Annual Report: Central Bank Sees Big Jump In Earnings From Forex Sales, Adding To Surplus

RBI Building. (Photo: BloombergQuint).

RBI Annual Report: Central Bank Sees Big Jump In Earnings From Forex Sales, Adding To Surplus

A higher-than-expected surplus transfer from the Reserve Bank of India to the government came mostly on account of income earned from sales of foreign exchange, under an accounting policy adopted by the central bank in FY19. The central bank saw a 69% jump in earnings from foreign exchange transaction, which, together with a lower transfer to its contingency fund, allowed for a larger transfer of surplus to the government.

The RBI’s annual report for a nine-month financial year of FY21 was released on Thursday. The central bank is in the midst of transitioning to an April-March financial year. As such, the comparison between FY20 and FY21 accounts is not apples-to-apples.

The annual report shows:

  • RBI balance sheet grew 6.9%, reflecting its liquidity and foreign exchange operations.
  • Income for the year fell 10.96%; expenditure decreased 63.10%.
  • Drop in expenditure was on account of a lower provision of Rs 20,710 crore vs Rs 73,615 crore a year ago.
  • This provision reflects a Rs 20,710 crore transferred to contingency fund.
  • As a result, the surplus stood at Rs 99,122 crore as against Rs 57,128 crore last year.
As a percentage of FY21 GDP, the central bank’s balance sheet has risen to 29% from 26% at the end of the last financial year.

Also read: RBI To Transfer Rs 99,122-Crore Surplus To Government 

What Led To The Higher Surplus?

The higher-than-expected surplus transfer announced earlier in the week led to speculation over the extent of contribution from 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.

The accounting change led to a large gain in FY21, the annual report shows.

Exchange gain/loss from foreign exchange transactions stood at Rs 50,629 crore in FY21 vs Rs 29,993 crore in FY20.

While the RBI has not disclosed the weighted average cost of dollars in its reserves, Kaushik Das, chief India economist at Deutsche Bank, makes an estimate.

“We know from RBI’s monthly forex intervention data, that the central bank has sold $85.2 billion between July’20 to March’21. Out of this, $66 billion were sold in January-March’21 itself, which is 77% of the total dollar sales over the nine-month period of FY21. Dollar/ rupee averaged about 73.7 between July’20 to March’21. If RBI sold $85 billion in FY21 and booked forex gains of Rs 50,629 crore then the average purchase price of the dollars works out to 67.76 by way of back calculation,” Das wrote.

Also read: How Rupee Swings Impact The RBI’s Dividend To The Government

Other contributors to the RBI’s earnings included:

  • Interest income from domestic sources, such as holdings of government securities and liquidity facilities, of Rs 43,588 crore in FY21 versus Rs 60,957 crore in FY20.
  • Interest income from foreign sources, including holdings of overseas securities, of Rs 25,469 crore compared to Rs 48,377 crore last year.
  • Total interest income declined to Rs 69,057 crore in FY21 compared to Rs 1,09,333 crore a year ago.
  • Other income rose to Rs 64,215 crore in FY21 from Rs 40,339 crore in FY20. Much of the gain in this category was on account of the gains from foreign exchange transactions.

The central bank reported a fall in expenditure as well. This was on account of a lower transfer to the contingency fund. Transfers to this fund are determined on the basis on a new formula recommended by the Bimal Jalan Committee. As per that, the contingency risk buffer has to be maintained at 5.5-6.5%. It has been kept at 5.5%, the lower end of the recommended band.

In FY21, the RBI transferred Rs 20,710 crore to the contingency fund vs Rs 73,615 crore a year ago. No transfer was made to the Asset Development Fund in FY21.

Balances in the Currency and Gold Revaluation Account decreased from Rs 9,77,141 crore as on June 30, 2020 to Rs 8,58,878 crore as on March 31, 2021, mainly due to appreciation of rupee and the fall in the international price of gold, the central bank said.

Watch a conversation on RBI’s balance sheet with former RBI deputy governor R Gandhi below:

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