RBI surplus transfer is the lowest in a decade

The Reserve Bank of India (RBI) on Friday decided to hand over its FY22 surplus of Rs 30,307 crore to the government, the lowest dividend in ten years, which will be reflected in the central budget calculation in FY23. Its board has decided to maintain the contingency risk buffer at 5.5%.

The dividend is less than one-third of the central bank’s generous transfers of Rs 99,122 crore for FY21, which is, in fact, based on the RBI’s surplus for the nine-month period till March 2021, as it decided to align its fiscal year. With the government.

Due to low central bank payments, partly due to its heavy investment in reverse repo operations, dividends from the RBI, state-run banks and other financial institutions in FY23 will drag out the government budget of Rs 73,948 crore unless transfers from other entities increase sharply. .

In fact, the RBI’s transfer would be only 41% of the government’s budgeted receipts for FY23, as opposed to about 98% of FY22’s revised estimates.

The drop in RBI dividends comes at a time when Ukraine has increased its subsidy by the conflicting government and threatened its bid to meet the fiscal deficit target of 6.4% in FY23, up from 6.9% in FY22.

Of course, there are still some bright spots. State-owned banks recorded a net profit of Rs 48,874 crore in the first three quarters of FY22, up from Rs 31,820 crore in the whole of FY21, the highest in five years. As their capital adequacy remains accurate and provision coverage has improved, the government has more opportunities to force them to pay much higher dividends this fiscal year.

However, since the government may have to spend approximately Rs 1.8 trillion more than the FY23 budget estimate on fertilizer and food subsidies, this is not the right time for revenue slipage in any account. Of course, as Finance Secretary TV Somanathan points out, the extra outgo could be offset by a big jump in net tax receipts and higher investment revenues.

The advanced dividend transfer by the RBI, especially from 2018-19, offered some cushions to the government as it fought the economic downturn before the epidemic spread.

Thanks to the Bimal Jalan Committee, which reviewed the RBI’s Economic Capital Framework (ECF), the central bank transferred an all-time high of Rs 1.76 trillion to the government in 2018-19 (July-June).

The RBI usually pays dividends from its surplus earnings on investment and valuation changes in its dollar holdings and receives that fee by printing currency among others. The depreciation of the rupee against the dollar in recent months may also have an impact on surplus transfers.

Madan Sabanvis, chief economist at Bank of Baroda, said the RBI would bear a modest cost due to heavy investment in the reverse repo auction in FY22. A Rs 6-7 trillion reverse repo auction (even at an average cost of 3.5%) would mean Rs 21,000-24,500 crore, he said.

The RBI’s underpayment would mean “a large chunk of the profits of PSBs and financial institutions will now have to be shifted to better this budget figure (Rs 73,948 crore), otherwise there will be a slippage”, Sabanvis said.

According to Saugat Bhattacharya, chief economist at Axis Bank, lower dividends could put some pressure on government finances. He added that the Center now needs to create additional resources to meet higher government spending requirements, including subsidies.

Aditi Nair, chief economist at ICRA, said: “The amount of surplus that will be transferred to the government by the RBI seems to be slightly less than the budget. However, tax receipts are expected to significantly exceed budget levels by exploiting the effects of the former. “

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