RBI payout to govt drops as it sets aside more money for rainy day

The Reserve Bank of India’s expenditure surged as it tucked away more money towards a contingency fund, it’s annual report showed, a development economists said cut the central bank’s surplus and led to the smallest dividend payout in a decade to the government.

While income rose by 20.1% in the financial year to March 2022, expenditure zoomed by more than 280% to ₹1.29 lakh crore, according to the report published Friday, with provisions worth ₹1.15 lakh crore ($14.8 billion) set aside and transferred to contingency fund. That was nearly six times the amount set aside last year, the annual report showed.

The contingency fund is a rainy day fund meant for unexpected and unforeseen situations, including depreciation in the value of securities, risks arising out of monetary and exchange rate policy operations conducted by the Reserve Bank of India.

During the year, revaluation of the central bank’s foreign currency investments lead to a charge of 942 billion rupees, leading it to shore up its contingency fund, the annual report showed.

The RBI recently approved a dividend payment of ₹30,307 crore to the Centre for the fiscal year ended March 2022, sharply lower than the government’s expectations.

The low payout may further strain the government’s fiscal position that is already under pressure from fuel tax cuts.

The bank’s central board of directors also decided to maintain the contingency risk buffer (CRB) at 5.5%, which comes from the contingency fund, is risk provisioning made from economic capital to cover monetary, credit, fiscal stability, and operational risks.

In the 2022 budget, the government had estimated that it would receive ₹73,948 crore as dividend from the RBI and state-run lenders for FY22, which would be transferred this fiscal.

Assuming that the government would receive an additional ₹10,000 crore as dividend from state-run banks, this would still fall short of the budgeted amount by about ₹30,000 crore.

The lower dividend payment was driven by higher provisioning to ensure adherence to the economic capital framework, said Anubhuti Sahay, chief economist for India at Standard Chartered Plc. Otherwise, the sell off in bonds globally and in India would have led to lower capital buffers, she said. The central bank has to maintain a contingency risk buffer of 5.5%, the minimum required.

The size of RBI’s balance sheet increased by 8.5% as on March 31, 2022, mainly reflecting its liquidity and foreign exchange operations during the year, the report said.

The increase on the asset side was due to increase in foreign investments, domestic investments, gold, and loans and advances, while that on the liability side, was due to increase in deposits and notes issued.

Domestic assets constituted 28.22% while the foreign currency assets and gold (including gold deposit and gold held in India) constituted 71.78% of total assets as on 31 March, 2022.