Tag: RBI

The Reserve Bank earned less on the record reserve pile up and also stares at lower interest income as banks parked surplus liquidity with it.

A nearly 25 percent jump in forex reserves has led to a fall in returns by nearly a fifth. Returns on reserves deployment were lower at $4.3 billion during April-December’20 compared with $5.2 billion in the same period a year ago, according to the latest data from the RBI.

Interest hit

The amount of interest it paid to keep the system in surplus liquidity could also hurt its returns as it paid interest for keeping funds with it.

Banks are estimated to have parked over Rs 5 lakh crore on an average during FY’21 on which the central bank has to pay them 3.35 per cent interest.

While RBI’s balance sheet has expanded since June 2020, yields on foreign currency investments have indeed reduced over the past year.

For the Accounting Year 2019-20 (July-June).the RBI transferred only 44 per cent of its surplus at Rs 57,128 crore to the government, which is the lowest in percentage terms in the last seven years.

How does RBI earn?

The RBI is a “full service” central bank, which is not only is it mandated to keep inflation or prices in check, but also has to manage the borrowings of the central and state governments supervise or regulate banks and non-banking finance companies and manage the currency and payment systems.

It makes profits while carrying out these operations. The central bank’s income comes from the returns it earns on its foreign currency assets, which could be in the form of bonds and treasury bills of other central banks or top-rated securities, and deposits with other central banks.

RBI also earns interest on its holdings of local rupee-denominated government bonds or securities, and on lending to banks for very short tenures, such as overnight. It makes a management commission on handling the government borrowings.

ts expenditure is mainly on the printing of currency notes and on staff, besides the commission it gives to banks for undertaking transactions on behalf of the government across the country, underwriting government borrowings.

Surplus transfer

The RBI isn’t a commercial organisation like the banks or other companies that are owned or controlled by the government and it does not, as such, pay a “dividend” out of the profits it generates.

The central bank transfer the “surplus” – that is, the excess of income over expenditure – to the government, in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934.

Excessive transfer

In August 2019, RBI’s central board gave its nod for transferring to the government a sum of Rs 1,76,051 crore comprising Rs 1,23,414 crore of surplus for 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF).

The excess reserve transfer was in line with the recommendation of former RBI governor Bimal Jalan-led panel constituted to decide the size of capital reserves that the central bank should hold. The government was represented by the then Finance Secretary Rajiv Kumar in the panel which finalised its report on August 14, 2019 by consensus.

Since 2013-14, the RBI has been paying 99 per cent of its disposable income to the government, which is battling to rein in deficits.

The size of the Reserve Bank’s balance sheet, which is reflective of activities carried out by it in pursuance of currency issue function as well as monetary policy and reserve management objectives, has increased by 30.02 per cent in the year ended June 30, 2020,