Given that the RBI’s surplus transferred to the Centre last year constituted about a fourth of the non-tax revenues in FY17, its tightfistedness this year is going to cost the Centre dear.

Recently, the RBI had taken the market by surprise when it stated that it would transfer just ₹30,659 crore of surplus to the Centre this year, half of the ₹65,876 crore it did in the previous year. Why has it robbed the Centre of nearly ₹35,000 crore of revenues this year? The RBI’s annual report for 2016-17 reveals that lower income, higher expenses and a transfer of ₹13,140 crore to its contingency fund are responsible for the lower dole out.

Let us consider income first. From ₹80,870 crore in 2015-16, the RBI’s income has fallen 23 per cent to ₹61,818 crore in 2016-17.

The main reason for the sharp fall in income was the net interest on liquidity adjustment facility (LAF) operations, which slipped to a negative ₹17,426 crore in 2016-17 from a positive ₹506 crore in 2015-16.

The Centre’s demonetisation move left banks flush with deposits with no viable credit opportunities to deploy them. Banks have been using the excess funds by lending to the RBI through the reverse repo option under the LAF window and investing in safe government securities.

While banks have been earning tidy interest on such surplus funds lent to the RBI, the latter has had to bear the cost. The interest paid by the RBI in 2016-17 has thus eaten into its income.

On the expenditure front, the cost of printing of notes has more than doubled to ₹7,965 crore in 2016-17, thanks to the Centre’s demonetisation move, from ₹3,421 crore in 2015-16.

The 33-odd per cent dip in the RBI’s net income for 2016-17 has, no doubt, led to the lower transfer of surplus to the Centre this year. But there’s another twist in the tale.

Re-building its kitty?

The RBI has chosen to be prudent this year and has transferred about ₹13,000 crore of surplus to its contingency fund; accounting for 21 per cent of income.

Additions to this fund had ceased since 2013-14 and the entire surplus in the RBI’s coffers was being transferred to the Centre until last year.

The RBI had been contributing a chunk of its profit to the contingency fund up to 2012-13. Between 2010-11 and 2012-13, the RBI had set aside 32-45 per cent of its gross income to this fund, with the intention of mitigating risks from unforeseen exigencies.

After a gap of three years, the RBI has once again started building its kitty. While the RBI’s conservative stance is welcome, it has left the Centre with less wiggle room to manage its fiscal deficit target.

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