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RBI’s Annual Report for 2020-2021

  • Posted By
    10Pointer
  • Categories
    Economy
  • Published
    2nd Jun, 2021
  • Context

    In a latest development, the Reserve Bank of India (RBI) released its annual report for the nine-months ended March 2021. As per the report, a 69 percent jump in the income from foreign exchange transactions and lower expenditure helped the central bank transfer a higher-than-expected surplus to the government this year.

  • What saved the economic game?

    • The foreign exchange transactions of the central bank have come as a saviour for the government even as the Covid pandemiccontinues to rage across the country.
    • The Reserve Bank of India (RBI) has been able to transfer a higher amount to the government as surplus this year following a sharp fall in provisions and gains from foreign exchange transactions during the year ended March 2021.

    Gain from foreign exchange transaction

    • The central bank’s gain from foreign exchange transactions rose from Rs 29,993 crore to Rs 50,629 crore in 2020-21.
    • A good chunk of the money transferred to the government was profit from the sale of dollars during the last three months of FY21 — $25.94 billion in March, $24.57 billion in February and $15.37 billion in January.
    • Last year, RBI dollar sales were just $8.03 billion in March and $1.46 billion in February.
  • How does it transfer surplus to the government?

    • Founded in 1934, the central bank operates under the Reserve Bank of India Act of 1934. The act mandates that profits made by the central bank from its operations be sent to the Centre. 
    • Every year, the RBI pays a dividend to the government from its surplus or profit.
      • In 2019-20, the RBI transferred only 44 percent of its surplus, Rs 57,128 crore, the lowest in the past seven years.
      • In 2018-19, the RBI has transferred Rs 1.23 lakh crore.
    • The central bank transfers the “surplus” – that is, the excess of income over expenditure – to the government, in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934.

    Section 47 of the RBI Act, 1934

    • Under Section 47 of the RBI Act, 1934, after making provisions for bad and doubtful debts, depreciation in assets, contribution to staff and superannuation funds and for all matters for which provisions are to be made by or under the Act or that are usually provided by bankers, the balance of the profits of the Reserve Bank is required to be paid to the central government.
  • What are the responsibilities of RBI?

    The RBI is a “full service” central bank. It is mandated to-

    • to keep inflation or prices in check
    • to manage the borrowings of the Government of India and of state governments; supervise or regulate banks and non-banking finance companies
    • to manage the currency and payment systems
  • How does RBI make profit?

    • Foreign currency assets: Typically, the central bank’s income comes from the returns it earns on its foreign currency assets, which could be in the form of bonds and treasury bills of other central banks or top-rated securities, and deposits with other central banks.
    • Interest on holdings: It also earns interest on its holdings of local rupee-denominated government bonds or securities, and while lending to banks for very short tenures, such as overnight. It claims a management commission on handling the borrowings of state governments and the central government.

    Expenditure

    Its expenditure is mainly on the

    • printing of currency notes and on staff
    • commission it gives to banks for undertaking transactions on behalf of the government across the country, and to primary dealers, including banks, for underwriting some of these borrowings
  • What can be the reason behind the increase of foreign exchange transactions?

    • Accounting change: The reason could be a change in accounting practice and increased returns from domestic assets.
    • The RBI recently allowed itself to book profits on its forex transactions from a weighted average cost perspective. This move could have helped the central bank boost yields on its foreign asset holdings.
    • Increased holding: Increased holdings of domestic government securities likely further amplified the central bank’s income for the year.
    • The rise in the RBI's surplus could be linked to higher interest income following the expansion in its holdings of G-sec related to OMOs and TLTROs, as well as the sizeable rise in forex reserves.

    TLTROs refer to targeted long-term repo operations used to infuse cash in the banking system for lending to specific sectors.

  • Conclusion

    Foreign currency and bond trading boosted the Reserve Bank of India's earnings for FY'21 though overall returns on its investments remain depressed. But the central bank would further explore diversifying asset base beyond traditional investment such as gold and the U S dollar.