RBI Cuts Sur­plus Trans­fer to Govt by More than Half

To trans­fer ₹ 30,659 cr to trea­sury; move comes amid talk that DeMo im­posed a cost on RBI

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Mumbai: The Re­serve Bank of In­dia slashed the sur­plus it trans­fers to the gov­ern­ment by more than half amid spec­u­la­tion that de­mon­eti­sa­tion im­posed a cost on the reg­u­la­tor which also func­tions as a banker to the gov­ern­ment. The un­ex­pected shrink­age in the RBI’s sur­plus trans­fer is likely to dent the gov­ern­ment’s fis­cal deficit cal­cu­la­tions, which may push up the bor­row­ings for the fis­cal year, said econ­o­mists.

The RBI would trans­fer ₹ 30,659 crore to the trea­sury, down from ₹ 65,876 crore a year ear­lier, it said in a state­ment. Record low yields from in­vest­ment over­seas may also have re­duced the re­turns for the RBI.

“There has been de­mon­eti­sa­tion re­lated sud­den jump in ex­penses, like print­ing notes, de­stroy­ing old notes, rush­ing it to cur­rency chests, etc. So, it’s no sur­prise that net re­serves have come down,’’ said R Gandhi, a former deputy gover­nor at the RBI. “For­eign cur­rency re­serves of the RBI were fetch­ing less re­turns be­cause most in­stru­ments in for­eign coun­tries were giv­ing neg­a­tive re­turns or very low re­turns.''

The cen­tral bank’s an­nual trans­fer of sur­plus is a sig­nif­i­cant amount for the gov­ern­ment. For many years, the RBI has been do­ing more than what the gov­ern­ment fac­tors in at the be­gin­ning of the fis­cal year in the union bud­get.

The lower div­i­dend this year will leave a big hole in the gov­ern­ment bud­get in fis­cal 2018, as it had bud­geted ₹ 74,901 crore as div­i­dend from the RBI, na­tion­alised banks and fi­nan­cial in­sti­tu­tions. Last fis­cal year, the gov­ern­ment re­ceived ₹ 76,172 crore as such div­i­dends of which the RBI con­trib­uted ₹ 65,876 crore, im­ply­ing that amount raised could be much less than bud­geted this year be­cause of the lower div­i­dend from the RBI. “The lower amount will be a con­cern since the gov­ern­ment’s non­tax re­ceipts will be af­fected,” said Mdan Sab­navis, the chief econ­o­mist at Care Rat­ings. “As PSBs are un­likely to do bet­ter than last year and the RBI will be trans­fer­ring a smaller amount, fis­cal deficit numbers will be im­pacted. If other con­di­tions re­main un­changed, the fis­cal deficit can in­crease from 3.2% to 3.4% this year.’’

The re­duc­tion could also be due to a num­ber of fac­tors, in­clud­ing higher cost of print­ing new cur­rency notes and cost of man­ag­ing ex­cess liq­uid­ity gen­er­ated from phas­ing out of ₹ 500 and ₹ 1,000 notes, though it is dif­fi­cult to iden­tify the ex­act rea­sons at this stage.

“Op­er­a­tional ex­penses in cost of print­ing new cur­rency and the as­so­ci­ated lo­gis­tics of col­lect­ing old notes are likely to have gone up,” said Sau­gata Bhat­tacharya, the chief econ­o­mist at Axis Bank. “The cost of ster­il­is­ing the ex­cess liq­uid­ity through MSS and re­verse re­pos would also be sig­nif­i­cant.”

The RBI, from 2014, trans­fers its en­tire profit to the gov­ern­ment, fol­low­ing global best prac­tices fol­lowed by cen­tral banks. An anal­y­sis of past profit state­ments of the RBI in­di­cates that a bulk of the in­come for the cen­tral bank is in­ter­est in­come, of which nearly 60% is in­ter­est earned on do­mes­tic bond hold­ings.


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