ECONOMIC NOTES

EPW Research Foundation

RBI Balance Sheet in Recent Years

A Prisoner of a Distorted Monetary
Policy Stance
R Krishnaswamy, S L Shetty

The Reserve Bank of Indias

latest accounts indicate that the
structure of earnings has clearly
shifted to domestic sources,
particularly from assets. Further,
the RBI has made large transfers
to the Government of India over
the past few years at the cost of
maintaining critical reserves to
ensure the financial stability of
the central bank. The RBI has not
made public a report that is said
to provide justification for such a
shift in policy. This goes against
the post-financial crisis view that
central bank operations must be
more transparent and open to
public scrutiny.

he Reserve Bank of Indias (RBI)

balance sheet, and profit and loss
account for 2013-14, reflects the
culmination of a contrived monetarist
policy stance that has been pursued vigorously for the past three to four years.
In the literature on central bank balance
sheets, there is a philosophical view that
RBI operations are a mirror image of
diverse domestic and external economic
transactions. It is also said that the balance sheet of the RBI reflects, and in a
way, influences the developments in the
economy the external sector, the fiscal
and, of course, monetary areas (Reddy
1997). All of these may be true, but a
review of the RBI balance sheet of the
past three years or so suggests that
an overwhelming influence has been
exercised by autonomous monetary
policy actions.
The following could sum up the
highlights of the RBI balance sheet for
2013-14 and a few earlier years: (i) phenomenal amounts of RBI surpluses have
been transferred to the government;
and (ii) this has been facilitated by
(a) large increases in earnings from

interest through a restrictive monetary

policy and (b) the absence of transfers in
2013-14 to protective funds, which have
always been built up year after year to
meet unexpected and unforeseen contingencies including depreciation in
asset values. With this latest action, the
RBI seems to have opened a window for
the government to eye central bank
profits to fill its fiscal gaps; this will have
dangerous implications for the future.
The sudden and large increases in the
balance transferred to the Government
of India from Rs 15,000 crore in 2010-11
and Rs 16,000 crore in 2011-12 to
Rs 33,010 crore in 2012-13, and further
to Rs 52,679 crore in 2013-14 stands out.
Domestic vs Foreign Sources
As shown in Table 1, RBI earnings from
foreign sources have dominated for
eight years 2003-04 to 2010-11 correspondingly subduing the importance of
its earnings from domestic sources, particularly interest earnings. The share of
domestic sources in total income had
dipped from 57.6% in 2002-03 to as little
as 6.8% in 2005-06. Thereafter, it ruled
in the range of 10.2% to 23.7% until
2009-10. There were undoubtedly sizeable increases in foreign exchange
reserves that were boosted by foreign
sources of income, but these differing
shares in income sources are not entirely
responsible for sudden increases in foreign exchange reserves. A more important factor has been the growthoriented, relatively low-interest-rate

Table 1: RBI's Domestic vs Foreign Sources of Incomes and Assets (Rs crore)
Year

R Krishnaswamy and S L Shetty are with the

EPW Research Foundation (epwrf.mumbai@
gmail.com), Mumbai.
Economic & Political Weekly

EPW

october 18, 2014

2001-02
2002-03
2003-04
2004-05
2005-06
2006-07*
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14

Foreign Sources
Amount
% to
Total Income

9,986
9,827
9,104
16,979
24,538
35,153
51,883
50,796
25,102
21,150
19,810
20,746
19,768

40.4
42.4
63.6
89.2
93.2
85.7
89.8
83.6
76.3
57.1
37.3
27.9
30.6

Domestic Sources
Amount
% to
Total Income

14,704
13,359
5,220
2,049
1,782
5,887
5,867
9,936
7,782
15,920
33,366
53,611
44,849

59.6
57.6
36.4
10.8
6.8
14.3
10.2
16.4
23.7
42.9
62.7
72.1
69.4

of Which: Interest Income

Interest Income
% to
% to Average
Total Income Domestic Assets

14,492
13,065
4,872
1,607
1,207
5,145
4,958
9,056
6,647
15,032
32,339
52,306
43,538

58.7
56.3
34.0
8.4
4.6
12.5
8.6
14.9
20.2
40.6
60.8
70.3
67.4

7.4
8.4
5.5
1.6
1.2
4.7
4.7
5.3
2.9
3.6
5.3
6.8
5.0

* RBI share sale profit Rs 34,308.6 crore excluded.

Source: RBI, Annual Report 2013-14 and earlier issues.

vol xlIX no 42

87

ECONOMIC NOTES

EPW Research Foundation

policy pursued by the RBI that resulted

in relatively low interest income for the
RBI and hence a reduced share of
domestic income. Second, in macroeconomic terms, low interest cost on
businesses and households helped
improve domestic savings and investment, and consequently also high
economic growth.
The focus here is rather on the sharp
and sudden jump in RBI earnings from
domestic sources, primarily interest
income in recent years. The share of RBI
income from domestic sources, which
had dipped from 57.6% in 2002-03 to
23.7% in 2009-10, suddenly shot up to
42.9% in 2010-11 and to 62.7% in 2011-12.
Thereafter it further jumped to 72.1%
and 69.4% in the next two years until
2013-14. This was the phase when the
RBI pursued a vigorously restrictive
monetary policy and an overwhelming
part of the increase in RBIs total incomes
was from increases in interest income,
far beyond the rate of increase in domestic assets. Interest income as a percentage of total income increased in a short
period from 20.2% in 2010-11 to 67.4% in
2013-14 (Table 1). Or the incidence of
RBIs interest income on average domestic assets more than doubled from 2.9%
in 2009-10 to 6.8% in 2012-13, and then
to 5% in 2013-14. Undoubtedly, this has
been the period when Indias overall
economic scenario was depressed.
Domestic Asset Earnings Up
Yet another indicator of the relatively
higher contribution of domestic incomes
vis--vis domestic assets is found in
Table 2: RBI's Assets (weekly averages of domestic assets)
Year

2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14

Foreign Assets
Amount
% to Total
(Rs Crore)
Assets

2,23,565
3,17,297
4,38,958
5,51,660
6,29,067
7,70,814
10,75,985
12,19,693
12,03,829
12,17,751
13,47,755
14,28,158
16,36,893

Source: As in Table 1.

88

53.5
67.0
83.3
84.7
86.1
87.5
91.0
87.6
84.2
74.3
68.7
64.9
65.3

Domestic Assets
Amount
% to Total
(Rs Crore)
Assets

1,94,554
1,56,365
88,289
99,978
1,01,304
1,10,227
1,06,413
1,72,221
2,25,374
4,22,033
6,14,050
7,72,484
8,69,477

46.5
33.0
16.7
15.3
13.9
12.5
9.0
12.4
15.8
25.7
31.3
35.1
34.7

their relative propo- Chart A: Percentage Share of Domestic Income in Total Income and
Domestic Assets in Total Assets
rtions, as depicted 71
in Chart A. In recent
58
years, during 2010-11
but particularly during 45
Domestic income share
2011-12 and thereafter, 32
when the share of
Domestic assets share
19
domestic incomes shot
up, there was no corre- 6
2002-03
2004-05
2006-07*
2008-09
2010-11
2012-13 2013-14
sponding rise in the
share of domestic assets (Table 2). While it was only the amount in excess of the
the income share shot up from about requirements for the CR that were to
23.7% in 2009-10 to the range of 62.7% accrue as profit to the government. Furto 72.1% in the latest three years, the ther reinforcing the point emphatically,
assets share has just edged up from TC-I writes, The Committee recom25% to around 35% during the same mends that adequate amount of the profperiod (Chart A). Thus, it is the sizeable its should continue to be transferred
increase in average earnings on domes- each year to CR (RBI 2013: 21).
When such an assertive statement
tic assets through higher interest rates
that explains the changes in relative was made, there was no scope for any
proportions between domestic incomes ambiguity about the need for any further review. To appreciate the nature of
and assets.
provisions that the RBI should be makThe Tale of Two Committees
ing, TC-I had examined the practices
In the preface to its accounts in the followed by 18 central banks. Given the
annual report of 2013-14, the RBI writes fact that in India, RBIs capital and
about Technical Committees I (TC-I) and II Reserve Fund together are wholly
(TC-II) that were appointed to review the inadequate in the context of the total
form of presentation of accounts and the assets of the Reserve Bank.... it is necespolicies relating to reserves provisioning, sary that the Contingency Reserves are
etc. It opines that Shri Y H Malegam built up (RBI 2013: 19). In this context,
(Technical Committee I) observed that the TC-I had the back-up of the recomthe existing policies relating to reserves, mendations of two earlier RBI commitprovisioning and accounting norms tees Subrahmanyam Group in 1997
needed to be examined in detail (RBI and Usha Thorat Group in 2005. The
2013: 136). As a follow-up, another Tech- Usha Thorat Group had settled on a
nical Committee II (also chaired by: much higher reserve adequacy ratio of
Y H Malegam) was constituted during 17.76% of total assets, rounded off to
2013-14 to review the level and ade- 18%, but it was not accepted by the RBI
quacy of internal reserves and surplus Central Board. The 12% norm affirmed
distribution policy of the RBI. But, by Malegam Committee-I was based on
intriguingly the report of TC-I has been the recommendations of the Subrahpublished, but that of TC-II remains manyam Group. This group took into
under wraps so far.
account the need for (a) possible losses
Interestingly, the TC-I report does not arising out of money and forex market
mention that the existing policies relat- operations, (b) shocks arising out of
ing to reserves, etc, need to be examined changes in exchange rates and gold
and that therefore, it needed a new com- prices, and (c) protection of assets from
mittee. In fact, TC-I was categorical that systemic risks, as also the cost of RBIs
the indicative target of 12% of total developmental role.
assets for transfer from gross profits to
Against this background, the absence
Contingency Reserves (CR) was intended of any transfer to CR and Asset Developto be the minimum level to be achieved ment Reserve (ADR) is now indeed sureach year (RBI 2013: 21). It further said prising. If TC-II had been placed in the
that the actual levels could be deter- public domain, we would have got a
mined based on circumstances and that sense of the rationale for this new
october 18, 2014

vol xlIX no 42

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Economic & Political Weekly

ECONOMIC NOTES

EPW Research Foundation

reserves policy. The RBIs annual report

does make a cursory reference to the
TC-II recommendations. It states that as
per TC-II, the balances in CR and ADR are
currently in excess of the buffers needed
and hence there was no need to make
any further transfers to these reserves.
Bland Statements on TC-II
The RBIs annual report for 2013-14 further argues that this recommendation of
the TC-II has been based on detailed
studies, but in the absence of any public
knowledge of these studies, it is difficult
to evaluate their rationale. Apparently,
the TC-II has elucidated,
[T]he various risks and the buffers required
to take care of the risks arising out of the
future appreciation in the exchange value of
the rupee, future depreciation in the market
price of gold and market value of investments in foreign securities, operational &
systemic risks, buffers required for further
capital expenditure and investment in subsidiaries and associated enterprises (RBI
2014: 139).

These are bland statements; the

reader would know that the committee
would of course take into account various risks and buffers required. But the
question is how this assessment of risks
and buffers is different from the norms
that the Subrahmanyam Group had perceived? As the issue involved is one of
analytical perceptions on possible future
risks and buffers, these are bound to
be at variance with existing accepted
norms. Therefore, to weigh these differing perceptions, the public at large ought
to have access to the TC-II report, but
alas it is not to be!
We do appreciate that the operations
of a central bank are somewhat different
from those of commercial enterprises
and that there may be sensitive information which it may be considered not
prudent to disclose (RBI 2013: 26). Also,
considering the sensitivity of the foreign
exchange portfolio, the details of its risk
management, particularly any exact
official assessment of its future appreciation and depreciation, may not be proper
to disclose. But, the current thinking
amongst the central banks of advanced
and many important developing countries, particularly after the recent financial crisis, is that they have to tread a
Economic & Political Weekly

EPW

october 18, 2014

delicate balancing act. The crisis has

reinforced the importance of increased
transparency in risk disclosures and the
subject of sensitivity in operations
should not be stretched so far as to minimise disclosures. Secondly, the financial
crisis has also reinforced the importance, more than ever before, of central
bank financial strength and independence, which inter alia require protective
reserves.
Against the background of these two
considerations, we have to judge the
prudence or otherwise of the RBIs decisions on (a) not disclosing the contents
of the TC-II report; and (b) not allocating funds for CR and ADR in 2013-14. In
these respects of transparency, disclosure, and the building up of reserves, it
is necessary to emphasise that in the
absence of any known alternative system of norms, the current arrangement
based on the Subrahmanyam Group recommendations appears sound and sufficiently transparent without jeopardising
the interest of central bank secrecy. Its
risk protection norms known in the public domain, now for more than a decade
and a half, do not seem to have harmed
or constrained RBI operations. Those
recommendations provided for (a) 5% of
total assets towards losses which cannot
be absorbed by current earnings arising
out of operations and re-interventions of
money, securities and forex markets and
depreciation of domestic and foreign
securities held by the RBI; (b) 5% for
shocks arising out of changes in
exchange rates and changes in gold
prices, which is an additional cushion
after recording the unrealised gains and
losses in the Currency and Gold Revaluation Account (CGRA) which are not
taken to the profit and loss account and
hence are unavailable for distribution;
and (c) 2% of total assets towards systemic risks, as also for any developmental role that the RBI may undertake. The
unrealised gains and losses in CGRA
appear large but they are just book
entries and are not to be counted as
tangible reserves.
It is based on the above detailed
norms that the Subrahmanyam Group
had set a target of 12% of total assets for
CR and ADR together, but the actual
vol xlIX no 42

reserves have never attained this 12%

norm; instead they have declined from
10.1% at the end of June 2013 to 9.2% by
the end of June 2014 (Table 3). Partly
because there have not been any transfers to CR and ADR during the year ended
June 2014. In the absence of information
Table 3: Outstandings in CR+ADR (Rs crore)
As on
30 June

2008
2009
2010
2011
2012
2013
2014

Total of
Contingency
Reserve and Asset
Development
Reserve
2

1,39,973
1,67,474
1,73,193
1,86,594
2,13,619
2,42,413
2,42,413

Asset as
per RBI
Balance
Sheet
3

14,62,983
14,08,194
15,53,058
18,04,666
22,08,945
23,90,711
26,24,367

CR+ADR as
% to Total
RBI Asset
(2 as % 3)
4

9.6
11.9
11.2
10.3
9.7
10.1
9.2

Source: As in Table 1.

as to how the TC-II has worked out the

possible incidences of risks and buffers
required to take care of the fluctuations
in individual components of assets,
operational and systemic risks, and
protection required for possible
increases in capital expenditures, as
well as additional developmental roles,
it is difficult to question the received
wisdom in these respects. On the other
hand, it could be argued that in the
current period of heightened uncertainties in financial markets, a strong
central bank balance sheet is a sine qua
non for the RBI. If assets grow by about
12% per annum as they have done over
the past five years, the buffers provided
in the form of reserves (CR and ADR)
too have to grow at this rate. Any curtailment of the growth in such reserves
will have dangerous implications on
the ability to maintain the financial
strength of the RBI. A loss of about 10%
in asset values in one or two years is
not unthinkable as it did happen in
the past.
References
RBI (2013): Report of the Technical Committee to
Review the form of Presentation of the Balance
Sheet and Profit & Loss Account (Chairman:
Y H Malegam), 30 April.
(2014): Annual Report 2013-14 and earlier
issues.
Reddy, Y V (1997): Financial Sector Reforms and
RBIs Balance Sheet Management, The Vysya
Bank 11th Annual Lecture on Banking at Bangalore, 11 November, http://rbidocs.rbi.org.in/
rdocs/speeches/pdfs/2497.pdf

89