Editorial

RBI to the rescue, again

| Updated on May 27, 2021

The central bank must be more transparent on how it generated the huge surplus   -  REUTERS

The Centre cannot be grudged large surplus transfer from the RBI, but prudence is important

The transfer of ₹99,122 crore of its surplus by the Reserve Bank of India to the Centre for the nine-month period from July 2020 to March 2021 is no doubt a shot in the arm for the latter’s finances. With tax revenues set to contract due to the pandemic, the funds received from the RBI will be handy in bridging the fiscal gap to some extent. The funds will also be useful to meet the additional expenditure incurred in combating the healthcare emergency in the country and to provide relief to the affected segments. That said, the quantum of the transfer, that too for a nine-month period, raises red flags. While the RBI’s Annual Report for 2020-21, which is yet to be published, will give a better picture about the manner in which the surplus was generated, there is a significant increase in the sum transferred, when compared to the ₹53,510 crore that was budgeted by the Centre.

The bumper transfer raises questions about the manner in which the higher surplus was generated to enable this transfer, especially since it was an extraordinary year in which the RBI had to take several measures that would have negatively impacted its surplus. The central bank’s balance sheet expanded considerably last fiscal year as it had to regularly conduct open market operations to support the large government borrowing. This would have resulted in higher outflow in the form of transfer to contingency reserve, even if the ratio was maintained at 5.5 per cent of the balance sheet. Two, while the interest income from domestic securities could have been higher due to the increase in holdings, the central bank has also increased the holding in foreign securities as it tried to sterilise the humongous foreign portfolio flows last year. These securities would not have yielded much interest income due to the low rates of interest in the US and Europe. With banks parking large surpluses with the RBI under the reverse repo window due to lower credit demand, the RBI’s interest payout would also have risen. It’s also likely that changes in accounting practices regarding foreign exchange transactions have made the higher transfer possible. While Centre cannot be grudged the transfer, it will be good if the RBI is transparent in disclosing the method of generating the surplus.

Also, it’s a trifle worrying to see that the RBI is preferring to maintain risk provisioning at 5.5 per cent of its balance sheet, which is the lower of the 6.5-5.5 per cent band recommended by the Bimal Jalan committee in 2019. Transfers to this reserve have been declining from around 10 per cent of balance sheet, prior to 2013, to under 6 per cent since 2019. With the monetary and financial stability risks and credit risks at an elevated level due to the uncertainty regarding the successive waves of the pandemic, the central bank could have adopted a more conservative approach to maintaining its contingency reserve.

Published on May 26, 2021

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