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
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.