Large scale open market operations (OMO) conducted by the Reserve Bank of India (RBI) and higher earnings from foreign exchange operations helped boost the central bank’s surplus to record levels in 2018-19.
The RBI posted a surplus of ₹1.23 lakh crore in 2018-19 compared to ₹50,004 crore in 2017-18 and ₹30,663 crore in 2016-17. On Monday, the central bank said that its board had approved the transfer of ₹1.76 lakh crore to the government, which includes the surplus of ₹1.23 lakh crore and excess provisions of ₹52,637 crore identified as per the revised Economic Capital Framework.
Massive liquidity
The RBI infused massive liquidity by buying back government securities. Holding cash does not yield any return but when invested in securities, interest income is earned. Market estimates suggest that the additional income during the accounting year was to the tune of ₹26,000 crore on larger OMOs.
“Interestingly, the regular dividend is much higher than the excess dividend, and almost double of the regular dividend transferred over the last five years. The reason for this is the record OMO purchases in FY19 (₹3 lakh crore, over 70% of g-sec issuances). It led to a high interest income,” economists at HSBC said.
In addition, there was a gain of ₹21,000 crore due to change in methodology to calculate foreign exchange gains, which was reflected in net income.
Observing the large transfer is likely to be one-time event, India Ratings said, “As the net liquidity injection under the liquidity adjustment facility continued in FY19 and the credit offtake remains weak, the banking system continues to see surplus liquidity. Therefore, while the RBI is likely to have sustained its earning from seiniorage income in FY19, the growth will come down incrementally.”
India Ratings said with the contingency fund reserve at about 5.5% of the total assets of the RBI, the central bank could be expected to appropriate its net income towards the fund in order to maintain the fund’s corpus at least at the current levels.