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 RBI is transitioning to an April-March accounting year from FY22.
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 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.
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.
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.
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.
The central bank’s annual report, which details its expenses and earnings for the year, is yet to be released.
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.
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.