Transfer to govt unlikely to affect asset side of central bank balance sheet
At Rs 1.23 lakh crore, the Reserve Bank of India (RBI)’s surplus for 2018-19 was higher than the surplus in recent years as a result of an unusually large amount of open market operations (OMOs) conducted by the central bank during the year and no need for fresh risk provisions.
The additional interest income from OMOs was Rs 36,000 crore and a change in the formula for determining forex gains and losses yielded gains to the tune of Rs 21,000 crore, said a senior RBI official. On Monday, the RBI said that it would transfer a dividend of Rs 1.76 lakh crore to the government for FY19, including a Rs 1.23 lakh-crore surplus and Rs 52,637 crore worth of excess provisions as per the new economic capital framework (ECF) evolved by the Bimal Jalan committee.
The dividend transfer — unprecedented in terms of quantum — will have no bearing on the asset side of the central bank’s balance sheet. In other words, the RBI will neither have to sell bonds to balance the transferred amount nor increase the currency in circulation by printing more banknotes, said a person familiar with the deliberations of the Jalan panel.
“The surplus sits as ‘other liabilities’ on the liabilities side of the balance sheet. Any dividend that would be made to the government would anyway be a liability side entry. So, the movement is really from one liability head to another. Even when the government uses the surplus to fund expenditure, it will move to banks’ accounts which are held with the RBI,” another source in the know of the development said, adding, “No asset sales will be made to offset the surplus transfer. We are very clear about that.”
The Jalan committee report, made public late Tuesday evening, observed that the practice of transferring interim dividends should be resorted to only in “exceptional circumstances”. In recent years, there have been two instances of interim dividend transfer – in 2016-17 and 2017-18.
To remedy the accounting-year mismatch which gave rise to the two rounds of interim dividend, the committee recommended that the RBI move to an April-March financial year from the current July-June year. “Historically, the July-June year would have been linked to the agricultural seasons which is not a consideration in these times,” the committee wrote in its report.
Apart from reducing the need for interim dividends, the move will enable the RBI to provide better estimates of the projected surplus transfers to the government for the financial year for budgeting purposes. It would also obviate any timing considerations that may enter into the selection of OMO/market stabilisation scheme (MSS) as monetary policy tools and bring about better cohesiveness in monetary policy projections as well as reports published by the RBI, the report observed.
Analysts agree that the sizeable surplus transfer is unlikely to stoke inflation. In a note on Wednesday, India Ratings and Research said the transfer of money from the central bank to the government results in the creation of base money (M0), which is different from the printing of currency notes. “Inflation is a secondary effect of higher government spending, which increases transactional demand for money. The RBI, therefore, in such cases needs to print money to facilitate the natural demand for currency,” analysts at the rating agency wrote.
They said the scope for inflation in the short term, due to a rise in money supply, is mostly caused by overheating in the credit market and its knock-on effect on the aggregate demand. Considering the general aversion to risk being displayed by both borrowers and lenders, the scope of inflationary risks arising out of the fiscal bonanza seems limited.