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RBI Surplus Transfer Propped Up By Change In Accounting Of Forex Gains

The RBI’s large surplus transfer to the government was propped up by higher net income from bond purchases

The Reserve Bank of India (RBI) logo is displayed on the bank’s building in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)
The Reserve Bank of India (RBI) logo is displayed on the bank’s building in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)

The Reserve Bank of India's large surplus transfer to the government was propped up by higher net income from bond purchases via open market operations and a change in the manner in which gains on foreign exchange operations are calculated, said a person with direct knowledge of the matter.

In FY19, the central bank earned an additional net income of Rs 36,000 crore from OMOs. It saw an additional Rs 21,000 crore in gains because it moved to the ‘weighted average cost model’ for calculating gains on its forex operations, this person said.

In total, the RBI transferred a record annual surplus of Rs 1.23 lakh crore to the Government on Tuesday. Another Rs 52,637 crore was transferred from the contingency reserves following the recommendations of the Bimal Jalan Committee.

This change in methodology for accounting for forex gains was suggested by a 2013 committee headed by YH Malegam, which looked at various aspects of the RBI’s balancesheet but this specific recommendation was not accepted by the RBI at the time. It has now been accepted after the Jalan Committee also recommended it.

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Change In Accounting For Forex Gains

Essentially, until now the RBI was calculating the difference between the rate at which it intervenes in the market to buy or sell dollars and the weekly revaluation rate for the currency. This difference was accounted as income, according to Ananth Narayan, associate professor for finance, at the SP Jain Institute of Management and Research. If the RBI moves to a ‘weighted average holding cost’ method, it would calculate the difference between the rate at which it intervenes and the weighted average cost of its holdings, he said.

In effect, since the weighted average cost of RBI’s holdings would be low due to reserves accumulated over time, the gains it would accrue though forex interventions would be larger, Narayan explained.

The accounting change is expected to reflect in RBI’s balancesheet, which is due to be released on Thursday as part of its annual report.

No Transfer To Reserves In FY19

During FY19, the RBI did not make any additional provisions toward risk management, which led to the entire income of Rs 1.23 lakh crore being available for transfer to the government, the person quoted above said.

In many years, the RBI removes a certain amount from its operating income to provide for any reserves it wants to create before transferring the surplus to the government. Since the central bank’s capital levels were within the range suggested by the Bimal Jalan committee, the entire surplus for FY19 was transferred to the Government.

The Jalan committee has recommended that the ‘realised equity’ be maintained at between 5.5-6.5 percent.

According to the person quoted above, the RBI central board’s decision to stick to a 5.5 percent realised equity level has been drawn from the experience of the European Central Bank. This level of reserves has been calculated while accounting for an extreme unforseen event in which 10 of the country's largest banks were to fail. Since such a scenario is highly unlikely in India, owing to the large number of public sector banks, the regulator believes that a realised equity level of 5.5 percent is adequate, this person explained.

The large surplus transfer is expected to be “balancesheet neutral” in the initial period, since the amount would continue to remain on the RBI's balancesheet as balance to be paid to the government, this person said.

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