S S Tarapore

An MRI on health of the economy

Updated on: Sep 06, 2012
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The RBI has made an effort to increase the transparency of its balance sheet. A cause for concern, however, is the increase in proportion of domestic assets.

The Reserve Bank of India (RBI) Annual Report is a statutory document presenting the Annual Accounts and Balance Sheet, and the Report of the Central Board on the Working of the Bank. Over the years, the Annual Report has given prominence to reviewing the developments and prospects of the economy and the statutory requirement of presenting the Annual Accounts and Balance Sheet has got relegated to the background.

Till the late 1980s, the approach was that the RBI should reveal the bare minimum required by law and secrecy was the hallmark. Progressively, a more enlightened approach emerged and the RBI now provides a more meaningful presentation. The RBI Accounts and Balance Sheet provide a Magnetic Resonance Image (MRI) of the health of the economy and is very different from a corporate balance-sheet.

When the RBI balance-sheet swells, it invariably portends a difficult situation for the economy. Quite often, an increase in the RBI profits is a cause of concern and the payment of dividend (by way of the surplus transferred to government) is no different from created money.

Bloated balance-sheet

Understanding the RBI requires accounting procedures and practices to stand on their head. Illustratively, the RBI impounds a part of the resources of the banking system by way of the Cash Reserve Ratio (CRR), but it does not pay interest on these cash balances. Per contra , the RBI meets agency charges/commission and security printing charges on behalf of the Government but these costs are not recovered from the Government.

The RBI’s balance-sheet size at the end of June 2012 was a staggering Rs 22.088 lakh crore and during the year ended June 2012, the size rose by Rs 4.043 lakh crore, that is, an increase of 22 per cent. While the growth of a corporate balance-sheet would invariably reflect strength, the swelling of the RBI balance-sheet is often a distress signal.

Of the total assets, as on June 30, 2008, 88.8 per cent related to foreign assets and 11.2 per cent to domestic assets. In June 2012, 65.6 per cent related to foreign assets and 34.4 per cent to domestic assets. The increase in the proportion of domestic assets reflects a deterioration in the quality of the RBI’s balance-sheet and the overall economic situation.

The RBI follows very strict accounting norms. Fluctuations in the valuation of foreign currency and gold are not put through the Profit and Loss Account but through a Currency and Gold Revaluation Account. This account builds up when the rupee depreciates and is drawn down when the rupee appreciates; this reserve is equivalent to 32.6 per cent of the foreign assets.

InsufficIent reserve

The RBI has a contingency reserve and an asset development reserve, which in June 2012 totalled Rs 2.14 lakh crore or 9.7 per cent of total assets. There are many unforeseen liabilities which can devolve on the RBI and a reserve of only 9.7 per cent is totally inadequate. In June 1993, the RBI was scraping the barrel of the contingency reserve in the context of the exchange loss under the Foreign Currency Non-Resident Account Scheme (FCNRA).

The building up of the contingency reserve is particularly important as the Government is in no position to pick up the losses once the contingency reserve is wiped out. One of the saddest events that can occur is the death of a central bank. This has happened in some countries and the RBI can never be too careful.

The procedure for distribution of the total income (gross) is unique. First, there are allocations to the internal reserves to get to the total income (net).Then the total expenditure is deducted to get to the disposable income, which is transferred to the Government. To the credit of the Government, it has not been avaricious as it has recognised the need to provide for contingencies. Thus, while the gross income rose from Rs 37,070 crore in 2010-11 to Rs 53,176 crore in 2011-12, the transfer to the Government increased from Rs 15,009 crore in 2010-11 to only Rs 16,010 crore in 2011-12.

The establishment expenditure of the RBI in 2011-12 amounted to Rs 7,085 crore. While the RBI has made commendable efforts to increase the transparency of the Accounts and the Balance Sheet, it would only be appropriate that it reveals its expenditure, activity-wise. After all, government departments have to undertake full disclosure of expenditure and the RBI departments should be required to do likewise.

Reserves management

Another area where greater transparency would be desirable is to compare the RBI’s in-house forex management vis-a-vis External Reserve Managers. In the past, the RBI’s in-house reserves management has been second to none.

The RBI balance-sheet provides advance information on the state of the economy. For instance, stagnant forex assets against rising imports shows that the import cover now is only seven months and the euphoria of excess forex reserves is fast disappearing.

Again, the liberal Open Market Operations (OMO) purchases of securities, while the borrowing programme is rising, perversely reduces yields on government paper. The large OMO is a violation of the Fiscal Responsibility and Budget Management Act (FRBM) 2003, if not in letter, certainly in spirit.

Financial analysts and economists would do well to focus on the RBI Accounts and Balance Sheet.

(The author is an economist. >blfeedback@thehindu.co.in )

Published on March 08, 2018

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