Ever since the Reserve Bank of India (RBI) announced a jaw-dropping surplus of ₹1,23,414 crore for 2018-19 (July-June accounting year), the question that has been uppermost on everyone’s mind is: how did the central bank post such a massive surplus?
In the immediate two preceding years, 2017-18 and 2016-17, the surpluses were only ₹50,004 crore and ₹30,663 crore respectively.
The RBI Annual Report for 2018-19, released on Thursday, provides the answers. There are two basic reasons for the impressive surge.
Dollar value
First, a huge ₹28,998 crore gain from foreign exchange transactions thanks mainly to a change in accounting policy. Until last year, when the RBI sold dollars in the market (to support the rupee), the gain or loss was calculated based on the previous Friday’s market value of the dollar. This policy was changed this year to reflect the historical acquisition cost of the dollar. A rough, back-of-the-envelope calculation puts this historical cost at around ₹53. This means that, if the RBI were to sell the dollar in the market today at around ₹72, it stands to gain ₹19 for every unit it sells.
In the previous year, the RBI posted a loss of ₹4,067 crore from similar transactions. Former top RBI officials say that the change in policy is not inappropriate as the earlier method resulted in understatement of gains. The RBI has been buying dollars regularly since the 1991 crisis to build up its reserves at rates much lower than the prevailing one.
When it sells those dollars, the actual gains have to be computed in reference to the weighted average acquisition cost and not that of the previous Friday.
The second reason for the higher surplus is a leap in interest income which was higher by ₹32,966 crore compared to 2017-18. The RBI conducted several rounds of open market operations (OMO) last year to infuse liquidity leading to a 57% jump in its holding of government bonds.
As per estimates by SBI Research, the RBI purchased a whopping ₹3,31,100 crore net of government bonds in 2018-19 through OMOs.
Interest from bond holdings alone was higher by ₹10,375 crore while Liquidity Adjustment Facility (LAF) operations yielded another ₹1,046 crore as interest earnings.
Last year, the central bank had paid interest of ₹9,541 crore to banks as it absorbed excess liquidity from the market. The liquidity infusion operations resulted in a rise in currency in circulation by a good 13.43% to ₹21,68,797 crore as of June 30 this year.
The RBI’s balance sheet size grew by 13.41% to ₹41,02,905 crore in 2018-19.
