How the RBI managed a large surplus transfer to the Centre in a difficult year

The Covid-19 pandemic dealt a hard blow to the Indian economy in 2020-21 and RBI had a tough job in supporting growth, ensuring adequate liquidity in the economy and supporting the Centre’s additional borrowings to finance its stimulus packages.

But despite the difficult conditions, the central bank has managed to transfer a healthy amount to the Centre for 2020-21.

Hit on many fronts

Since this is a transition year, the accounts for 2020-21 have been prepared for the nine month period between July 2020 to March 2021. The fact that the accounts for 2020-21 do not take in to account the June quarter of 2020, has been a blessing in disguise for the central bank. For the RBI balance sheet grew 30 per cent in 2019-20 to stand at ₹53,34,793 crore as on June 2020 largely due to RBI’s large G-Sec purchases in the June 2020 quarter.

For the period from July 2020 to March 2021, the RBI balance sheet increased by a more moderate 6.99 per cent as G-Sec purchases tapered in the subsequent quarters.

Global interest rates hit rock-bottom in 2020-21 with rates in many advanced economies moving below zero. But the RBI had to keep purchasing foreign securities due to the large foreign portfolio inflows last year. Foreign currency assets of the RBI increased from ₹31,10,366 crore in 2019-20 to ₹38,49,940 crore in 2020-21. But despite higher holding, earnings from foreign assets declined from ₹82,366 crore to ₹80,715 crore in this period, due to lower rates.

Further, the spike in US bond yields in February and March this year would have resulted in unrealised losses on foreign securities. Investment revaluation account for foreign securities declined from ₹53,833.99 crore as on June 30, 2020 to ₹8,853.67 crore as on March 31, 2021 due to these losses.

It was a similar story in RBI’s holdings of rupee securities as well. The balance in investment revaluation account for rupee securities decreased from ₹93,415.50 crore as on June 30, 2020 to ₹56,723.79 crore as on March 31, 2021, due to sale of rupee securities and losses booked due to hardening of yields at the longer end of the yield curve.

The central bank also continued to incur net outflows in its LAF operations. With domestic banks parking their surpluses with the RBI in the reverse repo window, due to the lower demand for credit, the net interest outgo under LAF, for the nine month period in 2020-21 amounted to ₹17,905 crore.

Reduction in expenses

Despite the difficulties faced, the central bank managed to give a rather generous ₹99,122 crore to the Centre. This is much higher than the sum estimated in the Budget this year, at ₹61,826 crore.

This was mainly because of the large reduction in expenses, which was 63 per cent lower compared to 2019-20.

Employee cost

Employee cost in 2020-21 has declined sharply, by 46 per cent. But that could partly be due to the smaller period.

The most significant decline in expenditure is in provisions, which is down from ₹73,615 crore in 2019-20 to ₹20,710 crore in 2020-21. The central bank had to transfer a much smaller sum to its contingency reserve to maintain it at 5.5 per cent of its balance sheet as recommended by the Bimal Jalan committee in 2019. This was possible due to the lower expansion in balance sheet in 2020-21, as explained above.

Forex transactions

The other contributor to the net income was — other income from foreign sources.

The RBI booked profit on foreign exchange transactions amounting to ₹50,629 crore in 2020-21. An additional amount of ₹11,348 crore was booked due to profit on sale or redemption of foreign securities. These profits have been made possible due to change in accounting practice as recommended by the Jalan committee.

It allowed the RBI to take the average cost of foreign exchange securities while calculating the profit or loss. The RBI’s higher activity in the spot and forward market of foreign exchange seems to have resulted in a windfall profit that was used to transfer funds to the Centre.

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