Timely Windfall

Context: The recent RBI’s transfer of surplus to the government is a much-needed buffer, but there are risks in banking on these surpluses.

Specifics of RBI’s transfer of surplus

• Way higher surplus transfers: RBI decided to transfer Rs 99,122 crore of surplus to the Centre.
  • It is almost double the Rs 53,511 crore that was budgeted for by way of dividend receipts.
  • This was consequent to a rise in RBI surplus that is over 73% higher than what it posted for the previous 12-month period ended June 2020.
• Factors for RBI’s rise in surplus:
  • A sharp 63% contraction in expenditure was a major factor in boosting the surplus, especially as income fell by 11%.
  • The biggest contributor in real terms was the Rs.50,629 crore of exchange gain realised by the cen­tral bank from its foreign exchange transactions.
  • Mopping up the record foreign direct in­vestment inflows that exceeded $81 billion (at a gross level) in the last financial year, as well as the sizeable portfolio investments from overseas.

Associated risks:

• May lead to moral hazard: Just two years ago, the RBI had transferred a record Rs 1.76­lakh crore to the exchequer.
• Reduced the safeguard room for RBI:
  • Evidently, contingency reserves are at the lower end of the 5.5%­6.5% band recommended by the Bimal Jalan committee.
  • The level of its reserves provides little wiggle room to safeguard against a sudden, unexpected financial crisis.
• Expected swelling of RBI’s balance sheet: With the government facing the likelihood of overshooting its budgeted borrowing, given the higher spending needed to bolster vaccinations, health care and direct fiscal support.

Conclusion: It would behove policymakers to remember that the central bank is ultimately the lender of last re­ sort to the nation as a whole and can ill­-afford to be less than adequately funded to meet every conceivable contingency.