RBI transfers its surplus to the govt, but the deficit is just too wide

The amount may not be very significant in terms of supporting the govt finances as it would be around 0.25% of GDP against an expected fiscal deficit of close to 8% for 2020-21

The transfers from RBI to the government is always keenly watched. This year the RBI Board has approved a transfer of Rs 57,128 crore to the government as against Rs 1.48 trillion in 2018-19 and Rs 40,000 cr in 2017-18. Last year it was higher due to the additional formula driven transfer of reserves to the central government. It was a one time transfer and hence the benefits are not recurring to the same extent.

The amount may not be very significant in terms of supporting the government finances as it would be around 0.25% of GDP against an expected fiscal deficit of close to 8% for 2020-21. However, given that there are likely to be slippages on other accounts such as tax revenue and disinvestment in particular, this is useful. Also the transfer at this point of time is critical as the government does require funds to meet various commitments.

Interestingly, the Budget had targeted an amount of Rs 89,000 crore from RBI, PSBs and FIs. Hence this amount would contribute significantly but may not be able to help reach the target as the profits from the other two components may not be attained. Banks may have to resort to the restructuring programme and deferred NPA recognition options to make lower provisions and hence reveal higher profit. Also it must be noted that the RBI has said that given the facilities extended by the central bank to banks, payment of dividend this year would not be there in which case the government would get affected. Against this background, the amount could be considered to be lower than what may be have been expected by the government. There could be limited upside given the decision to maintain the contingency risk buffer at 5.5%.

The issue of RBI transfers to the government has become important of late as it is a large amount and comes from the normal course of central banking activity. In a year where the RBI has a larger LAF programme, there would be a tendency for more money to be earned by the central bank. Conversely in FY21 for instance where the RBI has been more active with the reverse repo, the net earnings could be lower as payouts would be more than receipts from repo (LTRO, TLTRO).

There was debate last year on transfer of reserves of the RBI to the government and the Bimal Jalan Committee had drawn up a formula. Hence the bulk of the stock of reserves which had to be transferred were invoked. From then on it would be only the surpluses of the RBI which would vary depending on the interest rate regime and liquidity operations. When large OMOs are conducted as were in FY19 there was a tendency for earnings of the central bank to increase which pushed up the surpluses. FY20 has been typified by both low interest rates and surplus liquidity which work in favour of borrowers and not lenders.

It does look like that going forward the RBI may be a steady though not hyper-active provider of funds to the government. The only way out would be if there is direct lending to the government where the latter pays interest to the central bank which comes back as transfer of surpluses. This could open the door for debate again.

The author is Chief Economist at CARE Ratings. The views expressed are personal