What Are RBI’s Surplus Funds?

Introduction

The Central Board of the Reserve Bank of India (RBI), on 26th August 2019, decided to transfer RBI’s surplus funds of Rs.1.76 Lakh Crore to the Government. What are these surplus funds of RBI? Where do the reserves come from?

RBI’s Rs.1.76 Lakh Crore Surplus Transfer to the Government

1. RBI’s Rs.1.76 Lakh Crore Surplus Transfer to the Government

• Managing the government’s banking transactions is a key RBI role. Like individuals, businesses and banks, governments need a banker to carry out their financial transactions in an efficient and effective manner, including the raising of resources from the public.
• The Reserve Bank of India’s (RBI’s) board on Monday approved a record surplus transfer of Rs.1.76 Lakh Crore, nearly double the budgeted amount of Rs.90,000 crore to the government.
• This is for the first time that RBI has provided such a huge amount to the government. 
• The total surplus funds transferred comprises of 2 parts :
  1. Rs.1.23 lakh crore of surplus or dividend for the year 2018-19 and
  2. Rs.52,637 crore was from surplus reserves or accumulated savings of RBI, which is the excess provision identified as per the revised Economic Capital Framework (ECF). It is a one-time transfer and is a first for the RBI.
• As on June 30, 2019, the RBI stands as a central bank with one of the highest levels of financial resilience globally.

2. RBI’s Balance sheet

• In 2017-18, the size of RBI’s balance sheet was Rs 36.2 lakh crore. Out of this, currency in circulation was Rs 19.12 lakh crore or more than 50 per cent of the size of the balance sheet. The currency notes that are in circulation, make up more than half its liabilities.
• The second biggest part in its liabilities is its reserves including total capital and provisions, which was Rs.10.53 lakh crore. The rest of its liabilities are deposits (Rs.5.6 lakh crore), made by banks in the form of CRR, which is interest-free.
• Another big share, 26%, represents its reserves. RBI earns regular income by deploying the reserves in interest-bearing foreign currency, government securities (essentially promissory notes bearing an interest rate against which the government borrows) and gold.
• RBI holds 566 tonnes of gold, which is valued at around Rs 2,26,000 crore at current market prices. This gold along with its forex reserves make up almost 77% of its assets

3. What is RBI’s Surplus Funds?

• RBI’s Surplus Funds is the amount which RBI transfers to the government after meeting its needs.
• There are two unique characteristics about RBI’s financial statements.
  1. Under Section 48 of the RBI Act, 1934, RBI is not liable to pay income tax or super tax on any of its income, profits or gains. and
  2. Under Section 47 of the Reserve Bank of India Act, 1934, after making provisions for bad and doubtful debts, depreciation in assets, contribution to staff and superannuation funds and other required provisions, the balance of the profits of RBI is required to be paid to the Central Government.
     • Thus, RBI has to transfer to the government the surplus left over after fulfilling its requirements.
• RBI’s income comes mainly through interest on the securities it holds and in 2017-18 the largest component of expenditure was a provision of about Rs.14,200 crore it made to the contingency fund. 
• The larger the provision made to contingency fund, the lower the surplus.

4. Where Do RBI’s Reserves Come From?

• RBI’s reserves consist of Currency and Gold Revaluation Account (CGRA), Investment Revaluation Account (IRA), Asset Development Fund (ADF) and the contingency fund (CF).
• RBI’s reserves, which was Rs.6.9 lakh crore in FY2017-18, consists of two things – Currency and Gold Revaluation Account (CGRA). This represents the value of the gold and foreign currency that the RBI holds on behalf of the government.
• The major sources of market risk faced by the Reserve Bank are currency risk, interest rate risk and movement in gold prices.
• Change in the value of reserves represents the changing market value of these assets. So, the RBI notionally gains or loses on this count every year depending on market movements. 
• For example, last year the CGRA increased by 30.5% largely because of the depreciation of the rupee against the US dollar and due to an increase in the price of gold. 

5. What is Contingency Fund (CF)?

• The Contingency Fund (CF) is a specific provision meant for meeting unexpected contingencies or emergencies that arise from :
  1. RBI’s Monetary Policy
  2. Exchange Rate Operations
  3. Depreciation in the value of securities
  4. Systemic risks and any risk arising on account of the special responsibilities on RBI
• In case of risks arising out of monetary/exchange rate policy operations, the RBI intervenes in the relevant markets to adjust liquidity or prevent large fluctuations in currency value.
• RBI contributes a notable portion of its profit to the CF. CF constitutes over a fourth of the RBI’s reserves.
• RBI has made provisions to CF, whch is around Rs.2.32 Lakh crore in for FY2016-17 and FY2017-18 or 6.4% of assets.
• The CGRA and CF put together constituted 26% of assets.