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RBI’s Surplus Transfer to the Government

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May 31, 2021

Why in news?

The Reserve Bank of India approved the transfer of Rs 99,122 crore as surplus to the central government for the accounting period of 9 months ended March 31, 2021.

What helped generate the surplus?

  • The RBI’s annual report shows that a sharp 63% contraction in expenditure was a major factor in boosting the surplus.
  • This is significant especially as income fell by 11%.
  • However, the biggest contributor in real terms was the Rs. 50,629 crore of exchange gain realised by the RBI from its foreign exchange transactions.

Why is the transfer significant?

  • The transfer comes as a windfall to the government.
  • The second wave of the COVID-19 pandemic has disturbed most projections for the economy including revenue assumptions.
  • The payout is almost double the Rs. 53,511 crore that the Finance Minister had budgeted for by way of dividend receipts.
  • The RBI has generated a surplus that is over 73% higher than what it posted for the previous 12-month period ended June 2020.
  • [Notably, RBI just changed its accounting calendar from July-June to an April-March format.
  • It thus had to truncate its last financial year to a 9-month period.]

What is the need for caution?

  • The magnitude of economic disruption caused by the pandemic and the uncertainty over its likely cost makes RBI’s transfer really significant.
  • The transfer is a much-needed buffer to the government’s finances.
  • However, both the Centre and the RBI need to be cognisant of the risks.
  • This is especially in terms of making a habit of banking on these surpluses to cushion the government’s coffers.
  • After all, just 2 years ago, the RBI had transferred a record Rs. 1.76-lakh crore to the exchequer.
  • The RBI has ensured that it maintains contingency reserves at exactly 5.5% of the overall size of its balance sheet.
  • It is thus at the lower end of the 5.5%-6.5% band recommended by the Bimal Jalan committee.
  • The level of its reserves provides little room to safeguard against a sudden, unexpected financial crisis.
  • Also, higher spending is needed to bolster vaccinations, health care and direct fiscal support.
  • Given this, government faces the likelihood of overshooting its budgeted borrowing.
  • This might affect the RBI’s balance sheet this year too.

What does this imply?

  • Policymakers need to remember that the central bank is ultimately the lender of last resort to the nation as a whole.
  • It can ill-afford to be less than adequately funded to meet every conceivable contingency.

 

Source: The Hindu

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