By TV Mohandas Pai & Nisha Holla
Last month, the Reserve Bank of India (RBI) shocked the market by announcing a Rs 2.10874-trillion surplus for government distribution — 141% higher than the FY23 surpluses of Rs 87,416 crore, and much higher than the Rs 50,000 crore budgeted in FY25. However, a study of its accounts from FY20 to FY24 shows the RBI has been earning and transferring significant surpluses to its own reserves, particularly the Contingency Fund (CF) — Rs 3.82586 trillion over the last five years. In FY23, the CF allocation was Rs 1.30875 trillion, which reduced to Rs 42,819 crore in FY24. The RBI’s earnings also include income from forex trading, which is uncertain and volatile, and could impact surpluses. Accounting for this as well, it seems the RBI is retaining significant surpluses, as detailed below.
An analysis of RBI accounts
The RBI’s FY24 income statements indicate an annual interest income of Rs 1.88605 trillion, with Rs 1.03177 trillion coming from foreign assets. Earnings from average foreign currency assets (FCA) total Rs 1.87471 trillion, but only Rs 1.03177 trillion appears in the income statement. The remaining Rs 84,294 crore was transferred to the Investment Revaluation Account-Foreign Securities (IRA-FS), as was Rs 91,831 crore in FY23. The RBI earned a 4.21% yield on average FCA in FY24, up from 3.73% in FY23, the improvement reflecting higher global interest rates on G-Sec securities.
The RBI’s accounting policy involves daily marking-to-market (MTM) of foreign and rupee securities, with unrealised gains recorded in the IRA-FS and IRA-RS accounts. As of March 31, IRA-FS had a negative balance of Rs 1.43220 trillion due to a decline in MTM value, and IRA-RS showed a negative balance of Rs 7,090 crore. These balances are reduced from the Contingency Fund (CF) at year-end and reversed the next fiscal year. This is where the RBI’s accounting policies do not reveal the full picture.
The RBI also maintains a Currency and Gold Revaluation Account (CGRA) to manage currency risk, interest rate risk, and gold price movements. Unrealised rupee gains/losses from FCA and gold MTM aren’t included in the income account. Due to the depreciation of the rupee against the dollar value of FS and increase in market prices of gold, both of which are initially accounted for at cost, cumulative unrealised rupee gains are credited to CGRA which had a balance of Rs 11.30793 trillion at the end of FY24 and Rs 11.24733 trillion in FY23.
In essence, while changes in MTM values of FS and RS impact IRA accounts, increases in the rupee value of balance FS and gold due to rupee depreciation are credited to the CGRA. These unrealised gains or losses do not appear in the income statement until realised, and negative IRA balances are deducted from the CF at each fiscal year’s end. Rs is the RBI’s reporting currency.
Holding appropriate risk capital
For the RBI to manage its risk sufficiently, the Bimal Jalan Committee (BJC) recommended a policy of having a CF of around 5.5-6.5% of its total balance sheet assets (BSA) as of year-end, with allocations made from its surpluses annually. At the end of FY24, the total funds for contingency were Rs 4.58095 trillion — 6.5% of BSA of Rs 70.47703 trillion. Further, the RBI must hold economic capital at 20.8-25.4% of BSA. At the close of FY24, its economic capital was Rs 15.89059 trillion (22.43% of BSA). This is the equity capital the RBI has.
While these seem to be in line with the BJC recommendations, the startling revelation is that the economic capital is on MTM value of investment assets whereas the risk is carried on the historic rupee cost of investment assets. It is only when the carrying value of investment assets declines to the rupee cost after setting off the CGRA that the risk crystalises on the historic rupee cost of assets for which the CF is created. On the BSA net of CGRA, totalling Rs 59.16739 trillion in FY24 (Rs 70.47703 trillion – Rs 11.30793 trillion), the economic capital (Rs 15.89059 trillion) rises to 26.86%. For FY23, with BSA net of CGRA at Rs 52.18668 trillion (Rs 63.44756 trillion – Rs 11.24733 trillion), economic capital (Rs 15.06768 trillion) revises to 28.74%.
Because of its complex accounting, the RBI is carrying surplus reserves — even by the standards of its own capital policy — as a result of calculating the economic capital on the rupee value of MTM of its investment assets rather than calculating it net of CGRA. We estimate an additional reserve of Rs 86,207 crore due to this accounting, which could have been distributed to the government. (26.86% – 25.4% = 1.46% of BSA net of CGRA = Rs 86,207 crore)
Transparency via simplified risk capital accounting
Currently, the RBI is over-calculating its contingency by not netting the BSA of CGRA. Further, the IRA (FS and RS) must be adjusted on CGRA rather than keeping it separate and reducing from the CF at year-end. When the IRA-FS and IRA-RS debited to the CF at the end of FY24 are added back, the total CF is Rs 6.08406 trillion — 10.28% of its BSA net of CGRA. This is a healthy risk capital for the RBI. Its CGRA then reduces to Rs 9.80652 trillion (by subtracting IRA-FS and IRA-RS).
The RBI must simplify its accounting practices and enhance the transparency of its financial statements. Key recommendations for achieving this include:
Computing risk on BSA net of CGRA, and simplifying the CF computation by adjusting the IRA on CGRA, and increasing the CF to, say, 10% of BSA net of CGRA.
Accounting for full earnings on average FCA in the income statement itself. Handling all adjustments to MTM value — decrease/increase in dollar value and rupee translation — through CGRA instead of CF and IRA-FS.
Offsetting IRA accounts against CGRA at year-end, ensuring CGRA reflects the full increase in rupee value of foreign assets. Any rupee appreciation should decrease CGRA accordingly.
Allocating surpluses from the income statement to the CF as required, without making IRA-related adjustments.
Basing economic capital, including CF, on BSA net of CGRA.
As the RBI is wholly owned by the government of India (GoI), which can recapitalise if necessary, the risks on the RBI’s balance sheet are essentially GoI’s risks. Thus, the RBI’s economic capital represents GoI’s equity. Retaining excess capital on the RBI’s balance sheets reduces government revenue, compelling the GoI to borrow unnecessarily, thereby increasing the fiscal deficit instead of using the capital it already controls.
The authors are chairman, Aarin Capital and technology fellow, C-CAMP, respectively
Disclaimer: Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproducing this content without permission is prohibited.