an you guess which Indian entity earns the highest net profit in any year? The answer is the Reserve Bank of India (RBI). In fact, the central bank is the highest money spinner, and in FY16 (year-ending June) had earned close to R66,000 crore in net terms, which is ultimately transferred to the government.
This amount is about 30% of the net profit of Sensex companies and also higher than the profit earned by the two highest profit earners: Reliance and TCS. Clearly, central banking is good business.
It should be pointed out that, by statute, the surplus of RBI has to be transferred to the central government and enters the budget calculations under the heading ‘non-tax revenue’.
It is important from the budgeting angle because it supports the budget deficit substantially. This amount was around 12.5% of the fiscal deficit for FY16.
Further, if this support was not there, the government would have to borrow the same from the market under ceteris paribus conditions, which will hit it hard. The significance of this amount can be gauged from the impact on the fiscal deficit ratio for FY16, which would have increased from 3.9% to 4.4%. So, transfer of surplus from RBI to the government is very significant.
The amount has become more aggressive of late, and was just about R18,800 crore in FY10. It accelerated to R33,000 crore in FY13 and to about R66,000 crore in FY15 and FY16.
The interesting part of the finances of RBI is that the revenue is based entirely on how much involvement is there of the central bank in the financial and forex markets.
There is nothing unusual about such transfers. For example, the Bank of England transfers 100% of the surplus of the Issue Department and 50% of the Banking Department to the Treasury.
The Bank of Japan retains 5% of the surplus while the Riksbank (central bank of Sweden) distributes 80%. Hence, the concept is not dissimilar, though the ratios are different.
The system of movement of funds is quite singular. RBI, for instance, earns considerable money from holding on to government securities (G-Secs), on which the government pays interest.
These securities are held by RBI for conducting open market operations (OMO) for infusing money or drawing out liquidity into the system. In FY15, RBI earned about R440 crore as interest on securities held, which would also most likely be the amount this year.
Hence, every time RBI infuses liquidity through OMO purchases—which will be a regular habit once it moves away from LAF—the earnings of RBI will increase as its holdings of G-Secs cumulate.
Being the central bank, there is no cost attached to providing liquidity (reserve money) except for printing currency, if needed. This component of interest income is almost 60% of total income earned.
Further, there is a gain to be made by selling securities, which helps the cause as the profit from sale of securities was R140 crore in FY15. Hence, RBI is also a major player in the G-Sec market—though for regulatory and not trading reasons.
The process of circular movement of funds is evident and interesting. RBI conducts monetary policy by dealing in G-Secs, which are issued by the government. The funds initially come from banks when they subscribe to these securities.
Next, they are picked up by RBI at a later date to infuse liquidity and thus the interest paid on these securities passes on to RBI. After covering up for expenses, the rest goes back to the government in the form of surplus transfers, which subsidise the budget that had generated these funds. This is not peculiar to RBI, but to all central banks and their governments.
Another curious item in the statement is earnings in foreign exchange. Last year (FY15) it was as high as R22,300 crore, out of a total income of R79,000 crore. Here too, there is a seamless flow of funds. The forex reserves with RBI are partly invested in securities of other governments, which are considered to be safe. The return is 1.3-1.4% (last year).
Intuitively, two factors increase RBI’s income and hence government revenue. The first is the overall quantum of forex reserves. All foreign currency earned has to be passed on to RBI except what is permitted to be held by banks.
So, when reserves begin to increase as the balance of payments improves, they are invested in securities of the US Federal Reserve or other central banks, which earn interest income. The cost for RBI is only monetisation of dollars, which is virtually free.
The second is the structure of global interest rates. As these rates change, so will the returns to the holders of these bonds. Thus, when the US Fed decides to increase interest rates, one of the beneficiaries will be the entire community of central bankers that park their surpluses there. The earnings would automatically increase.
Given this unique system of flow of funds, a question that can be posed is, are we using these resources in the best way? An argument put forward is that this amount should not be part of the budget and could be earmarked for other specific purposes, just like a cess.
There is some merit here, because unlike the other PSU surpluses which get transferred and are based on productive activity, in case of RBI surpluses are created through the peculiar status that the central bank has for printing currency.
Removing this lever will provide a true picture of the finances of the government, which is analogous to the disinvestment debate.
Given that this income is generated from the financial system, the gain should be earmarked for improvement of this sector, and one argument put forward is that it should be used for recapitalisation of banks.
While such provisions are there independently in the budget, they fall well short of these surpluses—maybe around one-third of the surpluses. By earmarking such funds, a commitment by the government to the PSBs would be refreshing and assuring.
This should certainly open the doors for a new line of thinking, given the capital problem with the PSUs that belong to the government, which has first charge on the surpluses of RBI that is also a part of the system. It can be the anvil for future growth too.
No comments:
Post a Comment