The RBI has recently transferred a sum of Rs 1,76,000 crore to government. This has caused quite an uproar. Many people are still confused if this was a right move by RBI and if RBI was forced to do this. We had received few emails as to how RBI arrived at this amount.
Below post is a clarification of the math behind RBI transfer and possible reasons this was done. If you’re too busy to read, CHECK OUT OUR YOUTUBE VIDEO ON THE SAME TOPIC BELOW
What is this Rs 1,76,000 crore in RBI transfer?
The RBI transfer to government was done as per the recommendation of the Bimal Jalan committee. This amount of Rs 1,76,000 crore consists of two components.
Dividend for FY 19 = Rs 1,23,414 cr
Transfer of surplus reserves = Rs 52,627 cr
Total transfer in FY 19 = 123414 + 52630 = Rs 1,76,000 cr approx.
Dividend for FY 19:
RBI receives income by doing open market Operations, Maintaining forex reserves and doing long term currency swaps. This income generated every year by supporting the money activity and interest generated from Bonds held by RBI is the income for RBI.
Any income minus its expenditure is the profit for RBI. In FY 2018-19, RBI generated a massive profit of Rs 1,23,414 cr which is much higher than the profit it had earned in the previous years.
So how come RBI generated such a huge windfall this year?
- It is estimated to be due to two major activities.
- First is that the RBI has moved to a weighted average cost system of Revaluing the Currency and Gold reserves. This is nothing but an accounting trick/method by which the difference between the Buying & Holding price of RBI price has increased. This amount added an approx Rs 32000 crores.
- The second is estimated that more new money has been created in the system and the approximation is that Rs 2.5 lakh crore new accounting money has been created. The interest from this money and the bonds purchased using this money has added to additional extra income. We are still waiting for the annual RBI report to verify this.
What is Contingency Fund and Reserve Surplus
The second component of the huge transfer is the excess surplus reserves maintained with the RBI. The RBI maintains a Contingency Fund for needs of the economy in case of any emergency.
This Contingency Fund is an emergency fund maintained from approx 1997 after the Foreign Currency crisis (FCNR). In 1995 the RBI had got into a crisis where it was unable to meet the obligation of FCNR accounts due to inadequate reserves and later a committee was formed in 1997 which recommended RBI to maintain sufficient balance with itself for emergency scenarios.
This is called the Contingency Fund and this is accumulated over 20-30 years and maintained as percentage of RBI assets.
New Economical Capital Framework (ECF)
The Reserve Bank of India balance sheet is estimated to be around Rs 40.5 lakh crore as of FY 19. The Economic Capital of this assets is approximately Rs 10.5 lakh crores ie., the money which is easily convertible to Cash & Cash Equivalents.
Economic Capital = Gold/Currency Revaluation Reserves + Contingency Fund
Approx Economic Capital as of FY 19 before transfer is:
Economic Capital = Rs 7.8 lakh crores + 2.8 lakh crore = Rs 10.5 lakh crore
The Reserve surplus in Contingency Fund was Rs 2.8 lakh crores which is approximately 6.8% of the total RBI assets of Rs 40.5 lakh crore.(The exact numbers would be available after RBI report released)
As we mentioned earlier, the new Economic Capital Framework (ECF) recommends that we maintain the Reserve Surplus at 5.5-6.5%. The RBI board decided to maintain this at 5.5% for this year.
This means there is an excess provision of 1.3% of its assets which is Over-Provisioning in emergency funds. The RBI has now decided transfer this 1.3# of (Rs 41 lakh crore) = Rs 52,634 crore to Government.
So this is the math behind the RBI transfer of Rs 1,76,000 crore to government. It is also rumored that this amount is very close to the Rs 1.7 trillion shortfall the government would have got in Tax Revenues this year. The budgeted revenue and the projected (Based on income generated so far) differ by Rs 1,70,00 crore.
Also View Infographic: What fiscal package did Finance Minister announce for slowdown
Looks like a coincidence and some economists believe that is not the case.
What are the goos and bad things from this transfer:
The RBI transfer has good and bad effects. Some are short term and some can be decided only after few years.
The same has been discussed in our Youtube channel where we have discussed about the above logic behind the transfer as well as below like
- How will this transfer affect RBI
- Will all governments maintain the Surplus at 5.5%
- Will it be enough for the economy in case of emergency
- How can the Government use this money
- Possible spending areas of this huge windfall
The above video should throw some more light on the topic. if you’re interested in reading the complex report on this RBI transfer, then here it is
What do you think will happen in the future. Did the RBI do the right thing ? Is the RBI losing its autonomy. What do you think of this RBI transfer ?
Let us know in the comments below. Share the article with friends and family if you found it useful.