Letters: Reserve Bank of India's income and reserves

This refers to the report “RBI’s income grows 12.7% in 2010-11” (August 26). Viewed in the context of the central bank’s income declining in 2009-10 by 46 per cent over 2008-09 (from Rs 60,732 crore to Rs 32,884 crore), the 12.7 per cent rise, achieved mainly by an increase in income from domestic sources, is not a matter of great comfort — especially because the growing size of RBI’s balance sheet calls for augmenting the reserves. Actually, there is a case for the government of India to forgo receipt of surplus income from the central bank, at least till RBI’s reserves position reaches the targeted level of 12 per cent of the Bank’s asset size. Transfer of surplus profit to the government this year was lower by around 25 per cent.

The reserves – contingency reserve (CR) plus asset development reserve (ADR) – as a percentage of total assets had come down from 11.89 in 2008-09 to 11.15 in 2009-10. In 2010-11, the corresponding percentage has shrunk to 10.34. The table gives the details of transfer from the Bank’s income to reserves and to the government during the past five years. Against the tentative target of 12 per cent of asset size for reserves (CR plus ADR) indicated by the Bank in earlier annual reports, the position improved from 10 per cent in 2005-06 to 11.89 per cent in 2008-09, after making up for a dip to 9.57 per cent in 2007-08. In 2009-10, a year that was particularly good for government finances, RBI transferred as much as 57 per cent of gross income to the government, bringing the reserves down to 11.15 per cent of the Bank’s asset size.

A central bank with a strong balance sheet will be an added support to the government when fiscal policy is in rough weather. To ensure that external compulsions do not dilute the strength of RBI’s balance sheet, the government should take measures to augment the share capital of RBI after carrying out appropriate amendments to the RBI Act. It should be obligatory on the government’s part to maintain RBI’s capital and reserves at a certain level (say, at 12 per cent of the balance sheet size). Till such time, RBI should be allowed to retain surplus income by transfer to reserves.
     

RESERVE FLOW Transfer from RBI’s income to reserves and to the government during the past five years (Rs /cr)
Item	2006-07

2007-08

2008-09

2009-10

2010-11

CR20,488.97
(49.92)33,430.74
(57.89)26,191.60
(43.13)5,168.39
(15.72)12167.27
(32.82) ADR1,971.51
(4.8)3,207.92
(5.55)1,309.70
(2.16)549.63
(1.67)1234.63
(3.33) Transfer to GOI11,411
(27.8)15,011
(25.99)25,009
(41.18)18,759
(57.05)15009
(40.49) Note: Figures in brackets indicate proportion to the total income
Source: RBI Annual Report, Table X.6

Considering the size of its balance sheet and the internal and external pressures on its income generating capabilities, the central bank’s reserves need to be augmented on an ongoing basis. RBI, on its part, should think in terms of generating reasonable income from deployment of captive funds it is mandated to manage, without compromising on the safety of investments. In this context, the addition to holdings in gold was a welcome beginning. The Bank should, at this stage seriously consider realignment of its portfolios especially under forex reserves.

M G Warrier, Mumbai

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