RBI’s Annual Surplus Transfer To Government Declines Sharply

The Reserve Bank of India’s surplus transfer to the government for 2019-20 fell sharply compared to a year ago as the central bank earned less from bond holdings and did not have any one-time gains to transfer unlike in the previous year.

The central board of the RBI approved a transfer of Rs 57,128 crore to the government for the accounting year 2019-20, it said in a release on Friday. The RBI decided to maintain the contingency risk buffer at 5.5%.

The transfer, while lower than last year, is in line with what the government had budgeted for. In comments made after the presentation of the Union Budget, government officials had pegged the RBI surplus transfer for the year at about Rs 60,000 crore.

"The surplus to be transferred by the RBI to the central government mildly trails the budgeted amount. However, this shortfall pales in comparison with the Covid-induced revenue shock from tax and non tax revenues and disinvestment proceeds, which we assess at over Rs 6 lakh crore relative to the Government of India's FY21 budget estimates," said Aditi Nayar, principal economist at ICRA.

Factors Behind The Fall

The transfer for 2019-10 is sharply lower than last year.

In 2018-19, a one-time transfer on account of a new economic capital framework adopted by the central bank had boosted the payout by Rs 52,637 crore. The additional amount was generated after a committee headed by former RBI Governor Bimal Jalan recommended that the level of the ‘realised equity’ should be maintained at between 5.5 and 6.5% of the RBI’s balance sheet. Before the review, this stood at 6.8% and the RBI's board decided to bring it down in one shot.

This year, the RBI maintained realised equity at 5.5%. In a note in June, Ananth Narayan, senior India analyst at the Observatory Group, had estimated that the RBI’s balance sheet had expanded by about 29% till June. “To maintain realised equity at 5.5% of the balance sheet, it would have to retain about Rs 65,000 crore of earnings when it closes its books in June 2020,” he had estimated.

The central bank, however, may have benefited from an accounting change that came into play in 2018-19. This was pertaining to how the RBI accounts for gains on its forex operations.

Starting last year, the RBI said it use the ‘weighted average holding cost’ to judge the income it earned from forex interventions compared to the earlier method of using the weekly revaluation rate. This accounting change will mean higher income booked by the RBI in years where there has been significant forex sales by the central bank. This forex accounting change could add additional income for the RBI, which may have added to the surplus transfer.

The central bank’s detailed balance sheet will be released at the end of August when it publishes its annual report. The central bank’s financial year runs from July-June at present, and is scheduled to be harmonised with the government’s April-March fiscal starting FY22. In the current year, the RBI will have a nine-month financial year, ending in March.