HOW DID RBI GIVE BONANZA TO GOVERNMENT?

BE/RBINOTE/45/2019

RBI through its Annual Report has brought a Surprise in the minds of people, as to how it could transfer huge surplus of Rs 1.76 lakh crore during FY19 ending June to the Government.

Positions

• The net of interim dividend paid earlier, the payable amount to Government of India stood at Rs 1.48 lakh crore.
• In FY18, RBI’s surplus was Rs 50,000 crore, and
• In the demonetisation year, it was merely Rs 30,600 crore.
• Thus we could see that there has been a massive jump of 250% in the FY19!

Where has this jump come from?  Let us see now.

Basically, there are three variables here:

1. A higher interest income on both domestic and forex assets (up Rs 32,800 crore YoY which was Rs. 1.17 lakh crore)
2. A massive rise in other income (up Rs 81,800 crore @ Rs 86,200 crore from Rs 4,410 crore in FY18)
3. Lower expenses (down by Rs 11,200 crore @ 170.5), largely contributed by lower provisioning (down Rs 14,400 crore)

These three components add up to a rise in surplus of Rs 1.26 lakh crore (Rs 32,800 crore + Rs 81,800 crore + Rs 11,200 crore).

Results

• Higher interest income is the result of higher yields on rupee assets (5.6% vs 5.2% in FY18) and Forex assets (2.2% vs 1.8%).
• Thus the average yield at 3.4 per cent was higher than our expectation of 3.1 per cent.
• Further, the Interest earned on rupee assets jumped by 29% to Rs 61,600 crore, which was largely due to a decline in repo payouts (impact of surplus created in FY18 due to demonetization led to a gain of Rs 10,500 crore)
• The gain of Rs 2.9 lakh crore OMO purchases of G-sec in the process of liquidity infusion.
• The massive other income of Rs 86,200 crore came majorly from
  • Special dividend paid from write-back of contingency reserve (Rs 52,200 crore), and
  • Capital gains on forex assets of Rs 29,100 crore.
  • Of this, Rs 21,500 crore is derived from a change in computation for exchange gain/loss using weighted average cost method.
• Clearly, the factors contributing to the steep rise in RBI’s transfer to the Government are one-offs.
• Hence, it will be fair to say RBI has worked in multiple ways to deliver large bonanza for the Government.

Conclusion

• While the Government is yet to decide the process of utilizing this surplus transfer, economists are of the opinion that it will be used for fiscal spending purpose, to counter the existing demand slackness.
• During the FY18, massing surplus liquidity was created due to demonetisation and GST impact, which RBI was forced to draw out, which resulted in an Income interest loss, which was reversed in the FY19.