RBI recently approved the transfer of surplus to the Government of India amounting to Rs.30,659crore for the year ended.
This is less than half of the surplus transfer in the previous year.
What is RBI’s surplus?
The RBI’s surplus represents the difference of income over its expenditure.
The key source of income for the Central bank is the interest arising from its foreign assets and domestic assets.
It includes the interest earned on bond holdings through open market operations or purchase and sale of government securities.
The transfer of profits is provided in Section 47of the RBI Act.
It states that the balance of the profits of the bank is required to be paid to the Central government.
In 2012-13, YH Malegam Committee recommended the central bank to transfer its entire surplus to the government, without allocating anything to its various reserve funds, because it had adequate reserve funds.
The RBI has been transferring its entire surplus to the government since 2013-14.
The RBI’s financial year runs from July to June.
What are the reasons for the decline?
The RBI did not provide any reason for the decline in dividend. The possible reasons could be –
Demonetisation -RBI’s expenses would have gone up on account of the demonetisation exercise, whereby old denomination notes were sucked out of the economy and new denominations were circulated.
Also the notes that are not returned remain as the RBI’s liability and cannot be passed on to the government.
Reverse repo -Reverse repo operation is when RBI borrows money from banks by lending securities.
The interest rate paid by RBI in this case is called the reverse repo rate.
It is done to absorb the liquidity in the system.
Multiple Reverse-repo auctions were conducted by RBI to drain surplus liquidity with the banking system after the demonetisation.
On an average, RBI paid 6% interest to drain the excess liquidity.
Rupee Appreciation -The rupee has appreciated by more than 6% against the dollar since January 2017.
This had depressed returns, in rupee terms, on the RBI’s foreign holdings.
What will be the impact?
In the Union Budget 2017-18, it was assumed that around Rs.75,000 crore would come from the RBI, public sector banks (PSBs) and financial institutions.
But the lower surplus will exert pressure on the government to meet its fiscal deficit (FD).
