Surplus distribution: RBI transfers Rs 50,000 cr to govt in FY18

To reduce the impact of cyclicality in the Reserve Bank of India’s economic capital levels on the surplus transferable to the government, the central bank has put in place a rule-based ‘staggered surplus distribution policy’ (SSDP) in FY18.

In FY18, the central bank transferred Rs 50,000 crore surplus in two installments, Rs 10,000 crore in March 2018, to help the Centre tide over a tight fisc and the remaining amount in August (RBI follows a July-June financial year compared with April-March by the government).

A historical analysis of the Reserve Bank’s economic capital (EC) levels suggested a discernible cyclical trend in the RBI’s EC on account of volatility in market forces, the central bank noted in its 2017-18 annual report. “With a view, therefore, towards reducing the impact of cyclicality, while putting in place a rule-based methodology for determining the provisioning requirements and consequently, the available transferable surplus to the Government of India, an alternative rule based approach, viz., the SSDP has been put in place,” it said.

Owing to pressure from the government, the RBI had transferred 99.99% of its income to the Centre as “surplus” between FY14 and FY16, up from around 50% or thereabouts earlier. The RBI did not make any fresh transfers to its contingency fund (CF) and the asset development fund (ADF) from its annual income between FY14 and FY16. However, it transferred Rs 13,140 crore in FY17 and Rs 14,190 crore. The RBI, being the bankers’ bank and the government’s bank, has multiple sources of income like the interest income from repo operations and coupon payments being received for holding government securities.

Earlier, the government was putting pressure on the RBI to give a portion of its internal reserves (CF and ADF) — these stood at a whopping Rs 2.55 lakh crore at the end of June 2018 — to help it to stick to its fiscal consolidation roadmap. The central bank had shown reluctance to dip into its internal reserves, citing the risks involved.

“In the case of central banks where the distribution arrangements result in continuous substantial transfers without considering the overall level of provisions and risk transfer mechanisms, the financial strength of the central bank may progressively weaken,” it said in the latest report.

A central bank requires a minimum level of confidence regarding its financial strength and the resources at its disposal which will allow it to effectively discharge its functions even during crises, it said. The CF represents the amount set aside annually for meeting unexpected and unforeseen contingencies, including depreciation in the value of securities, risks arising out of monetary/exchange rate policy operations, systemic risks, etc.