First create noise over Government getting bonanza from demonetisation, then create more when government does not get one…

This is with reference to the RBI transferring Rs 30659 cr of its surplus to the Government.

The experts and media say this has halved from previous two years transfer of 65000 cr. This is how the transfers have looked since 2000-01. The recent transfer of Rs 30659 cr is the fifth largest transfer in the period.

Surplus transferred to the Government
2000-01 9350
2001-02 10320
2002-03 8834
2003-04 5400
2004-05 5400
2005-06 8404
2006-07 11411
2007-08 15011
2008-09 25009
2009-10 18759
2010-11 15009
2011-12 16010
2012-13 33010
2013-14 52679
2014-15 65896
2015-16 65876

The decline in transfer of surplus has for once buried the hope that RBI would transfer a one time bonanza to the government. These expectations started post demonetisation which said as large % of demonetised currency will not come back to the system, the rest would be a windfall profit which will be transferred to the Government. However, as times went by and RBI released its weekly balance sheet via WSS, all these expectations were belied. The shortfall in currency was mainly adjusted via Reverse Repo transactions which absorbed the huge surplus liquidity in the system.

It was a fundamental mistake to mix currency which is a liability and Profits which emerge from Income and Expenditure Statement. This piece by a IIT Bombay Professor who speacialises in Anthropology and Sociology got it right where most economists erred.

This is how Profits of RBI (for that matter any central bank) come into being:

RESERVE BANK OF INDIA INCOME STATEMENT FOR THE YEAR ENDED JUNE 2016
(Amount in ₹ billion)
INCOME Schedule 2014-15 2015-16
Interest 12 744.82 749.24
Others 13 47.74 59.46
Total 792.56 808.70
EXPENDITURE
Printing of Notes 37.62 34.21
Expense on Remittance of Currency 0.98 1.09
Agency Charges 14 30.45 47.56
Interest 0.01 0.01
Employee Cost 40.58 44.77
Postage and Telecommunication Charges 0.91 0.78
Printing and Stationery 0.34 0.33
Rent, Taxes, Insurance, Lighting, etc. 1.14 1.40
Repairs and Maintenance 1.04 1.01
Directors’ and Local Board Members’ Fees and Expenses 0.03 0.02
Auditors’ Fees and Expenses 0.03 0.03
Law Charges 0.04 0.07
Miscellaneous Expenses 7.97 6.42
Depreciation 2.42 2.20
Provisions 10.00 10.00
Total 133.56 149.90
Available Balance 659.00 658.80
Less:
a) Contribution to:
i) National Industrial Credit (Long Term Operations) Fund 0.01 0.01
ii) National Housing Credit (Long Term Operations) Fund 0.01 0.01
b) Transferable to NABARD:
i) National Rural Credit (Long Term Operations) Fund1 0.01 0.01
ii) National Rural Credit (Stabilisation) Fund1 0.01 0.01
Surplus payable to the Central Government 658.96 658.76
1. These funds are maintained by the National Bank for Agriculture and Rural Development (NABARD).

The income is mainly via interest earned from Forex assets (read foreign securities), Government bonds and liquidity operations. RBI gives further break up in the 12th and 13 Schedule:

Schedule 12: Interest
(a) Domestic Sources
(i) Interest on holding of Domestic Securities 436.30 430.79
(ii) Net Interest on LAF Operations 28.29 5.06
(iii) Interest on MSF Operations 1.88 1.32
(iv) Profit on Sale of Domestic Securities 139.15 21.68
(v) Depreciation -98.28 0.00
(vi) Interest on Loans and Advances 14.06 3.98
(vii) Premium /Discount on Amortisation of Domestic Securities 0.00 42.58
(b) Foreign Sources
(i) Interest on holding of Foreign Securities 223.42 243.83
Total 744.82 749.24
Schedule 13: Income-Others
(i) Discount from Foreign Assets 4.40 4.94
(ii) Exchange from Foreign Exchange Transactions 29.62 38.36
(iii) Commission 13.38 15.31
(iv) Rent Realised 0.05 0.05
(v) Profit/loss on sale of Bank’s property 0.02 0.02
(vi) Provision no longer required and miscellaneous income 0.27 0.78
Total 47.74 59.46

As we can see, last two years highest share of  income has come from holding domestic securities which means the coupon interest. Interest from Foreign securities is about 20% of total income.

One will have to see how these basic headings fare in this year’s accounts. But given RBI holds these securities these accounts should not change much.

The one item which will really matter this year is Printing of Notes in the Expenditure category. There would be a huge rise in this account due to demonetisation which set the printing notes in frenzy. This should account for much of the decline in Profits and transfer of surplus to Government from previous years.

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