In a year marked by considerable fluctuations in the exchange rate of the rupee, the Reserve Bank of India (RBI) reported a sizeable accretion to its exchange fluctuation reserve. The balance in the account at the end of 1997-98 was Rs 25,143.03 crore as against an opening balance of Rs 10,080.93 crore at the beginning of the year _ a net addition of Rs 15,062.10 crore.
In comparison, the RBI had reported a net utilisation of Rs 1,895.49 crore in the earlier financial year. Since any depreciation in the external value of the rupee increases the exchange fluctuation reserve, a sizeable accretion indicates that the rupee suffered heavy depreciation during the period.
As per the accounting policies of the central bank, gains or losses incurred in valuation of foreign currency and gold are not booked in the profit and loss account but entered into another account called exchange fluctuation reserve (EFR).
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EFR funds are also being utilised for replenishing the exchange equalisation account (EEA) to meet the exchange losses on accrual basis in respect of liabilities of the RBI arising out of guarantees extended by it. The balance in the EEA at the end of 1997-98 stood at Rs 639 crore. "It fully provides for the exchange difference on foreign currency funds parked by Indian financial institutions which are expected to be withdrawn by March 1999," notes the report.
The RBI annual report is hopeful that EEA will not come under pressure in the near future as exchange guarantees are no longer being extended by the apex bank. Moreover, the schemes for which such guarantees were extended in the past are almost coming to a close.
However, the fluctuation in the external value of the rupee could affect the balances in this account. As the RBI annual report points out, the EFR comes under pressure whenever there is an appreciation of the rupee against gold, the US dollar and other currencies. On a rough reckoning, a one per cent appreciation inthe rupee against the dollar at the current level of foreign exchange assets will result in a drawdown of EFR by Rs 1,018 crore.
A one per cent fall in gold prices would tend to reduce the EFR by Rs 130 crore. And, a one per cent appreciation of the US dollar against other currencies would erode the EFR by Rs 340 crore. A depreciation of the rupee would likewise result in an increase in EFR. The EFR of Rs 25,143.03 crore at the end of 1997-98 was equivalent to 22.96 per cent of foreign currency assets of the apex bank, substantially up from 9.6 per cent at the end of June 1997.
The overall surplus of the RBI increased to Rs 5981.10 crore at the end of June 1998 from Rs 5267.43 crore at the end of the previous year _ a 13.5 per cent increase. Adjusted for contributions to various funds like the National Industrial Credit (long term operations) Fund, the surplus payable to the central government amounted to Rs 5977.10 crore, a 13.6 per cent rise over the previous year's figure of Rs 5263.43 crore.
Total income rose to Rs 14,083.64 crore during 1997-98 from Rs 13,256 crore in the previous year. While income from foreign investments showed a rise, that from domestic operations saw a fall during the year.
The fall was on account of a sharp decline in discount earnings, which was partially offset by increase in interest earnings on holding of government securities. Since the issue of ad hoc and on-tap treasury bills were discontinued from April 1, 1997 and were converted into special securities, the central bank's discount earnings went down during the year while its interest earnings have shown an increase.