The Reserve Bank of India regional headquarters in New Delhi. The RBI has been purchasing bonds to inject more funds into money markets. Image Credit: Bloomberg

Mumbai: The Reserve Bank of India’s record payout to the government turns the focus back to the central bank’s profits and how it can afford such a massive transfer.

Almost 70 per cent of the Rs1.76 trillion (Dh90 billion, $24.5 billion) disbursement is derived from the income the central bank earned on its investments, likely gains from changes to accounting of its foreign exchange policy, and the fees it gets from printing notes and minting coins. The rest, about Rs526 billion, comes from its surplus capital.

“The reason for this is the record open market bond purchases in the financial year to March 2019,” said Pranjul Bhandari, chief India economist at HSBC Holdings Plc. “It led to a high interest income.”

The central bank earned an additional Rs360 billion through interest income from its domestic bond portfolio and 210 billion rupees from foreign exchange intervention operations.

Strong market intervention

Central banks generally buy and sell government bonds as part of normal monetary operations, affecting liquidity in the market by boosting or withdrawing cash into the system. In India, where a shadow banking crisis has caused a cash crunch, the RBI has been purchasing bonds to inject more funds into money markets.

Bhandari estimates the government bought 3 trillion rupees of bonds in the market in the fiscal year through March, making up more than 70 per cent of sovereign bond issuance. The windfall from the central bank couldn’t have come at a better time for Prime Minister Narendra Modi, who is under pressure to halt a sharp slowdown in the economy.

The money gives New Delhi more fiscal options, including possibly lowering its market borrowings or boosting spending to shore up growth.

Two parts to the handover

The RBI payout this year represents two parts: dividends and a capital transfer. The central bank pays dividends to the government every year, based on the profit from its investments and printing of notes and coins. It also holds substantial foreign securities in its investment portfolio, but interest income from that is seen lower than its domestic holdings because local rates are higher compared to those in the US, UK or Japan.

The dividend of Rs1.23 trillion is double the amount that had been transferred in recent years, and represents the entire net income of the RBI for the year ended June.

The capital transfer of Rs526.4 billion is based on the recommendations of a panel set up to study how much excess capital the central bank holds.

The panel recommended, among other things, that the RBI’s economic capital — made up of realised equity and revaluation balances — should lie within the range of 20-24.5 per cent of its balance sheet. It prescribed maintaining the realised equity — or contingency buffer — between 5.5-6.5 per cent.

The RBI board accepted both the recommendations, which took its payout to a record. But economists warned that future payments might not be as huge.

“The committee has lowered the prospect of a sizeable transfer of RBI’s reserves over the next few years, as revaluation stores from the RBI’s balance sheet might be excluded from any excess capital calculation,” Radhika Rao, an economist at DBS Group Holdings Ltd. said in a note.