The RBI transferring a modest ₹57,128 crore by way of surplus for the accounting year 2019-20, has pinched the funds-starved Centre hard, amid an already challenging economic environment. So, after transferring a tidy ₹1,75,987 crore last year, why has the RBI more than halved its dole out to the Centre for 2019-20 (accounting year)?

A peek into the RBI’s accounts for 2019-20 reveals that the central bank’s surplus has been impacted by a fall in income and a transfer of ₹73,615 crore to the contingency fund (CF) during the year. The RBI’s total income fell by 22 per cent in 2019-20, led by the huge interest outgo on its reverse repo operations. Remember, banks sitting on huge surplus have been parking huge sums under reverse repo window over the past year. This appears to have dragged the RBI’s interest income in 2019-20.

As such, the RBI’s transfer to the Centre was expected to pale in comparison to the large surplus last year, which got a boost from the ₹52,637 crore write back from the central bank’s CF, thanks to the Bimal Jalan Committee recommendations.

Lower earnings

In 2019-20, the RBI’s total income shrunk by 22 per cent to ₹1,49,672 crore. The lower income was on account of two reasons.

One, after a 44 per cent jump in interest income in 2018-19, the RBI reported a meagre 2 per cent growth in 2019-20. This was mainly due to the huge interest outgo on reverse repo operations during the year. Banks can borrow money for the short term from the RBI under the LAF. Alternatively, they can lend their excess funds to the RBI through reverse repo (absorption of liquidity). With banks remaining risk-averse to lending, they have been parking huge surplus funds under the reverse repo over the past year. Hence, the net interest on LAF (liquidity adjustment facility) operations that had turned positive in 2018-19 (after two years of negative figure post demonetisation) slipped to the negative in 2019-20. From a positive ₹1,046 crore in 2018-19, the RBI reported net interest on LAF of negative ₹13,053 crore in 2019-20. This impacted the RBI’s interest income.

Two, the other income in 2019-20 declined by 53 per cent. This was mainly due to a higher base last year. The other income in 2018-19 got a boost from the write-back of ₹52,637 crore from the RBI’s CF. The Jalan panel last year had recommended that the CF be maintained at 5.5 per cent of the RBI’s balance sheet. Hence the excess in the outstanding CF (at 6.8 per cent then) was written back, bumping up the other income component. On this higher base, the RBI’s other income in 2019-20 appears optically lower.

What has dragged earnings further is the RBI’s transfer of ₹73,615 crore to the CF in 2019-20. This has been in line with the panel’s recommendation of keeping 5.5 per cent of total assets in the fund at all times. With the RBI’s balance sheet growing 30 per cent in 2019-20, it has transferred the required portion of its earnings to the CF (to meet 5.5 per cent threshold). This has also eaten into the RBI’s surplus in 2019-20.

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