Change in forex gain calculation, higher interest under repo boost RBI surplus

The Bimal Jalan Committee recommended surplus transfer of a whopping ₹1.76-lakh crore by the RBI to the government.

Of this, ₹1.23-lakh crore was the net income that the central bank earned in fiscal 2018-19, which was more than double the amount it earned in the previous fiscal. What puzzled most economists was how the central bank managed to earn such a large income?

The RBI’s annual report reveals that a sharp boost in other income, on account of change in computation of exchange gain/loss, has been a key reason for the bump-up in income. The one-time impact has added ₹21,464 crore to the other income in fiscal 2018-19. Excluding this, too, the RBI’s core income has gone up by 44 per cent, thanks to the interest earned on repo operations and increase in coupon income due to increase in portfolio of rupee securities.

The write-back of about ₹52,600-crore excess provisions from the contingency fund to transfer to the government has also boosted other income.

In a nutshell, this implies that the huge surplus transfer made by the RBI to the government this year, is unlikely to repeat in the next year.

Breaking it down

According to the annual report, the RBI’s income increased by a robust 146 per cent in 2018-19 after growing by 26 per cent in the previous year. The main reason for this massive jump has been the sharp increase in other income at ₹86,199 crore in FY19, from ₹4,410 crore in the previous year. One known component of this increase is the write-back of over ₹50,000 crore from the contingency fund, on the back of the Jalan panel recommendations. The panel had suggested that contingency fund be maintained at 5.5 per cent of total assets; the excess over and above this threshold has been transferred to the government.

But aside from this accounting transaction, what has mainly bumped up the other income is the change in computation of exchange gain/loss.

The annual report states that it has used the weighted average cost method, which has resulted in an impact of ₹21,464 crore.

Exchange gains from foreign exchange transactions stood at ₹28,998 crore in FY19, from a loss of ₹4,067 crore in the previous year. Reports suggest that the change in methodology for accounting for forex gains was suggested by a 2013 committee headed by YH Malegam, which has also been recommended by the Jalan panel.

While the details of the new methodology is unclear, what’s certain is that such a gain is unlikely to recur, and hence, the surplus transferred to the government can be lower.

On the core income front, net interest on liquidity adjustment facility (LAF) operations turning positive after being negative for two years, also aided overall income.

In 2016-17, the net interest on LAF operations slipped to a negative of ₹17,426 crore. Banks flush with funds post demonetisation lent to the RBI through the reverse repo option under the LAF.

The interest paid by the RBI to banks under reverse repo in 2016-17 had eaten into its income. In 2017-18, lower surplus liquidity in the banking system vis-a-vis the previous year, led to a lower interest outgo for the RBI under the reverse repo window. The RBI’s net interest income from LAF operations increased by about ₹7,900 crore in 2017-18, though still a negative ₹9,541 crore, owing to continuing interest outgo under reverse repo.

In 2018-19, the net interest income was a positive ₹1,046 crore, as banks borrowed from the RBI.

On the expense front, there were no surprises, but for the sharp increase in employee cost.

Remember, after a gap of three years, the RBI had once again started transferring funds to its contingency fund in 2016-17. Continuing the trend, the RBI had transferred ₹14,190 crore in 2017-18 to the contingency fund.

This year, with funds being pulled out of the contingency fund, the fund has shrunk to ₹1,96,344 crore, from ₹2,32,108 crore in the previous year.

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