The scars of the tough battle that the RBI waged last fiscal — to keep bond yields under check and to control system liquidity while managing the government’s expanded borrowing programme — are evident in the Reserve Bank of India’s Annual Report 2021-22. The key takeaway from the Report is that in a situation of elevated yields and persistent inflation, the value of domestic and foreign securities being held by the central bank could take a hit in FY23 as well, impacting transfers to the Centre and straining the fisc. The central bank’s surplus which could be transferred to the Centre fell 69 per cent over 2020-21 to ₹30,307.45 crore, mainly due to the losses suffered on its holding of rupee and foreign securities. The holding of rupee securities increased due to open market operations and G-SAP auctions conducted to support government borrowing and absorb excess liquidity. The need to maintain exchange rate stability despite large foreign portfolio inflows, resulted in an increase in its dollar-denominated securities as well. With bond yields spiking sharply in the US as well as in India, the central bank has incurred mark-to-market losses on these holdings in FY22, which reduced its contingency fund balance. While the outstanding balance in the rupee securities revaluation account could absorb the loss suffered on domestic securities, almost 90 per cent of the ₹94,249 crore loss on foreign security holding had to be transferred to the contingency fund. This warranted transfer of ₹1,14,567 crore to this reserve to maintain the minimum risk buffer at the mandated 5.5 per cent.

Besides the losses on its investments, the outgo due to its LAF operations too doubled in 2021-22 to ₹35,501 crore as banks parked their large surplus funds with the RBI. Outgo from these operations are likely to be high this fiscal too with the RBI shifting to the SDF rate, which is higher than the reverse repo rate. The SDF rate will also move higher with RBI’s policy rate hikes, increasing the central bank expense. With bond yields expected to be buoyant and prices under pressure this fiscal due to raging inflation and monetary tightening by central banks, the RBI surplus could be lower in FY23. The problem is that the economic capital of RBI, which includes contingency fund, asset development fund and revaluation accounts now make up just 20.6 per cent of the assets, which is the minimum requirement. If the central bank’s holding of rupee and foreign securities continue to suffer revaluation losses, there could be a decline in transfers to the Centre in the future too. The lower surplus transfer by RBI to the Centre for FY23 will affect the fiscal math, for which the Centre should create the budgetary space. But in these extraordinarily challenging times, the Centre and the RBI are right in giving precedence to price stability to protect future growth and stave off stagflation.

The Report also points to “frailties” in the NBFC space, “in their balance sheets and (the need to) ensure robust asset-liability management”. It has said that “several measures” are on the anvil this fiscal. While extending digital payments in India and abroad, the RBI has indicated a “graded” approach to introducing CBDC. Overall, the RBI’s job is cut out: curtailing inflation and maintaining financial and external account stability.

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