RBI Board Recommends Switch To April-March Financial Year

The board of the Reserve Bank of India has recommended a change in the central bank’s accounting year to April-March starting 2020-21. The RBI currently follows a July-June financial year.

“The Board recommended aligning the financial year of RBI, currently July-June, with the Government’s fiscal year (April-March) from the year 2020-21 and approved forwarding a proposal to the Government for its consideration,” the central bank said in a statement on Saturday.

An Eight-Decade Old Tradition

The RBI has followed a July-June financial year since 1940, when it moved away from a January-December financial year.

Volume one of the RBI’s history explains the reasons behind the central bank’s choice. It cites number of reasons for the decision, including the fact that December, in those days, was a period of heavy currency outflows due to Christmas and New Years.

But another key reason behind not following the same calendar as the government was to allow the central bank to incorporate the government’s accounts for any given year fully. “Furthermore, the majority of the commercial banks closed their accounts on December 31 and if the Bank wrote its report in July it would have ample opportunity to study their annual balance-sheets,” says RBI’s history volume one.

Jalan Committee Recommendations

Over time, the considerations have changed and recommendations have been made to align the central bank’s financial year with that of the government and the commercial sector.

Most recently, the committee headed by former RBI Governor Bimal Jalan, set up to review the central bank’s economic capital framework, had suggested aligning RBI’s financial year with the government’s fiscal year. This would help align dividend payments with the government’s budgeting process and avoid the practice of interim dividends, the committee had said.

According to the panel’s report the RBI would be able to provide better estimates of the projected surplus transfers to the government, and help the central bank in better ‘cohesiveness’ in monetary policy projections.

Review Of Monetary Policy Framework

Separately, speaking after the central board meeting, RBI Governor Shaktikanta Das said that the central bank is internally reviewing the monetary policy framework, which was adopted in 2015 and set an inflation target of 4 percent, within a tolerance band of +/-2 percent, for the country’s central bank.

The agreement signed between the government and the RBI in February 2015 had set the inflation target for a period of five years till March 2021.

Over this period, questions have been raised about whether the RBI and the government were correct in targeting headline inflation instead of core inflation, which is more reflective of demand conditions in the economy. Equally, the 4 percent target chosen has been debated.

Das said these aspects are being reviewed.

“Internally we are reviewing, analysing how the monetary policy framework has worked over the last three-and-a-half years. There is already an internal review process going on,” Das said, responding to a question asking whether the RBI should start targeting core inflation.

While the inflation target comes up for review in March 2021, the four-year terms of external members on India’s Monetary Policy Committee will come up for review by September 2020.

Commenting on monetary policy, Das, who along with the rest of the Monetary Policy Committee, voted for a status-quo in interest rates earlier this month, said that the decision to pause was based on prevailing high inflation.

However, the transmission of earlier rate cuts is slowly improving, Das said.