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 India’s
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 India’s (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)

R Krishnaswamy and S L Shetty are with the
EPW Research Foundation (epwrf.mumbai@, Mumbai.
Economic & Political Weekly


october 18, 2014


Foreign Sources
% to
Total Income



Domestic Sources
% to
Total Income



of Which: Interest Income
Interest Income
% to
% to Average
Total Income Domestic Assets




* RBI share sale profit Rs 34,308.6 crore excluded.
Source: RBI, Annual Report 2013-14 and earlier issues.

vol xlIX no 42


6% in 2002-03 to 23. Second.5 33.067 7. In fact. low interest cost on businesses and households helped improve domestic savings and investment.985 12.050 7.5 9.958 5.978 1.17. the RBI writes fact that in India.. primarily interest income in recent years.7 31.565 3. The share of RBI income from domestic sources.033 6. But.3 68.. need to be examined changes in exchange rates and gold and that therefore.0 16. etc. it is the sizeable its should continue to be transferred increase in average earnings on domes. another Tech.76% of total assets. assets share has just edged up from TC-I writes. 2014 vol xlIX no 42 EPW Economic & Political Weekly .8% in 2012-13.6 2002-03 2004-05 2006-07* 2008-09 2010-11 2012-13 2013-14 sponding rise in the share of domestic assets (Table 2). The 12% norm affirmed distribution policy” of the RBI.6 84.01. RBI’s 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.8 25.7 their relative propo. and then to 5% in 2013-14.public domain.each year to CR” (RBI 2013: 21).4% in the next two years until 2013-14. It further said prising. during 2010-11 but particularly during 45 Domestic income share 2011-12 and thereafter.554 1.23. rounded off to 2013-14 to review the level and ade.22.Chart A: Percentage Share of Domestic Income in Total Income and Domestic Assets in Total Assets rtions.7 86. 88 53. If TC-II had been placed in the that the actual levels could be deter. In recent 58 years.7 15.38.289 99. 32 when the share of Domestic assets share 19 domestic incomes shot up.56.693 12. sary that the Contingency Reserves are etc. which had dipped from 57. far beyond the rate of increase in domestic assets.2 74.17. there was no scope for any proportions between domestic incomes ambiguity about the need for any further review.9% in 2009-10 to 6. 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).14. TC-I had examined the practices In the preface to its accounts in the followed by 18 central banks. account the need for (a) possible losses Interestingly. Or the incidence of RBI’s interest income on average domestic assets more than doubled from 2. the TC-I report does not arising out of money and forex market mention that the existing policies relat.03. This was the phase when the RBI pursued a vigorously restrictive monetary policy and an overwhelming part of the increase in RBI’s total incomes was from increases in interest income.0 12. Domestic Asset Earnings Up Yet another indicator of the relatively higher contribution of domestic incomes vis-à-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 2.660 6. To appreciate the nature of and assets.829 12. This group took into under wraps so far. While it was only the amount in excess of the the income share shot up from about requirements for the CR that were to 23.297 4.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.1 34. Thereafter it further jumped to 72. and (c) protection of assets from mittee.9 65.25.operations. the ther reinforcing the point emphatically.06.4% in 2013-14 (Table 1).36.751 13. The focus here is rather on the sharp and sudden jump in RBI earnings from domestic sources.72.1 87.304 1.1% in the latest three years.7 64. as depicted 71 in Chart A.7% in 2011-12. Furto 72..28. As a follow-up. it is necespolicies relating to reserves provisioning.0 83.10.7% in 2009-10. assets for transfer from gross profits to Against this background.814 91.19.3 13.477 46.2% in 2010-11 to 67. The 2013: 136).7% accrue as profit to the government.9% in 2010-11 and to 62. there was no corre.413 1. it needed a new com.18%.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. but that of TC-II remains manyam Group.1% and 69. Given the annual report of 2013-14. In this context.70.29. (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. Undoubtedly.5 67. but it was not accepted by the RBI quacy of internal reserves and surplus Central Board.0 87. provisions that the RBI should be makThe Tale of Two Committees ing.3 35.374 4. by Malegam Committee-I was based on intriguingly the report of TC-I has been the recommendations of the Subrahpublished.221 2. When such an assertive statement tic assets through higher interest rates that explains the changes in relative was made. we would have got a mined based on circumstances and that sense of the rationale for this new october 18. in macroeconomic terms. and consequently also high economic growth.prices. this has been the period when India’s overall economic scenario was depressed.227 1.72.3 84.365 88.75.51. It opines that “Shri Y H Malegam built up” (RBI 2013: 19). suddenly shot up to 42. (b) shocks arising out of ing to reserves.158 16. as also the cost of RBI’s the “indicative target of 12% of total developmental role.755 14.9 12.3 Domestic Assets Amount % to Total (Rs Crore) Assets 1. Interest income as a percentage of total income increased in a short period from 20. Thus.484 8. TC-I was categorical that systemic risks.94.4 15. “The Committee recom25% to around 35% during the same mends that adequate amount of the profperiod (Chart A).7% in 2009-10 to the range of 62.893 Source: As in Table 1.

the current arrangement based on the Subrahmanyam Group recommendations appears sound and sufficiently transparent without jeopardising the interest of central bank secrecy.413 Asset as per RBI Balance Sheet 3 14. Apparently. may not be proper to disclose.7 10. 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”.04. it is necessary to emphasise that in the absence of any known alternative system of norms. These are bland statements. http://rbidocs.474 1. Against the background of these two considerations. as also for any developmental role that the RBI may to weigh these differing rdocs/speeches/pdfs/2497.08.711 26.90. the reader would know that the committee would of course take into account “various risks and buffers required”. the current thinking amongst the central banks of advanced and many important developing countries.1% at the end of June 2013 to 9. But. 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. these are bound to be at variance with existing accepted norms.62. Reddy. It states that as per TC-II. Partly because there have not been any transfers to CR and ADR during the year ended June 2014. operational & systemic risks. buffers required for further capital expenditure and investment in subsidiaries and associated enterprises (RBI 2014: 139). it is difficult to evaluate their rationale. particularly any exact official assessment of its future appreciation and depreciation. operational and systemic risks. 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.pdf 89 .73.2% by the end of June 2014 (Table 3). securities and forex markets and depreciation of domestic and foreign securities held by the RBI. disclosure. Bland Statements on TC-II The RBI’s annual report for 2013-14 further argues that this recommendation of the TC-II has been “based on detailed studies”. 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. which inter alia require protective reserves. do not seem to have harmed or constrained RBI operations.13.rbi. 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).42. [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.9 11. A loss of about 10% in asset values in one or two years is not unthinkable as it did happen in the past.194 15.2 10. as well as additional developmental roles. 30 April. (b) 5% for shocks arising out of changes in exchange rates and changes in gold prices. Any curtailment of the growth in such reserves will have dangerous implications on the ability to maintain the financial strength of the RBI. 11 November. 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.24.86. instead they have declined from 10.42. but in the absence of any public knowledge of these studies.413 2. and the building up of reserves.367 CR+ADR as % to Total RBI Asset (2 as % 3) 4 9. Secondly. The Vysya Bank 11th Annual Lecture on Banking at Bangalore. the details of its risk management. and protection required for possible increases in capital expenditures. 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. On the other hand. but the actual vol xlIX no 42 reserves have never attained this 12% norm. particularly after the recent financial crisis.2 Source: As in Table 1.945 23.973 1.39. In these respects of transparency. of central bank financial strength and independence.058 18. the TC-II has elucidated. Its risk protection norms known in the public domain. now for more than a decade and a half. we have to judge the prudence or otherwise of the RBI’s decisions on (a) not disclosing the contents of the TC-II report.67. it is difficult to question the received wisdom in these respects. The RBI’s annual report does make a cursory reference to the TC-II recommendations. it could be argued that in the current period of heightened uncertainties in financial markets. Y V (1997): “Financial Sector Reforms and RBI’s Balance Sheet Management”. a strong central bank balance sheet is a sine qua non for the RBI. and (c) 2% of total assets towards systemic risks. considering the sensitivity of the foreign exchange portfolio. In the absence of information Table 3: Outstandings in CR+ADR (Rs crore) As on 30 June 1 2008 2009 2010 2011 2012 2013 2014 Total of Contingency Reserve and Asset Development Reserve 2 1.193 1. the financial crisis has also reinforced the importance.53. Also. 2014 delicate balancing act.619 2. The unrealised gains and losses in CGRA appear large but they are just book entries and are not to be counted as tangible reserves. 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).666 22. Therefore. 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.ECONOMIC NOTES EPW Research Foundation reserves policy.1 9. – (2014): Annual Report 2013-14 and earlier issues.983 14. more than ever before.594 2. If assets grow by about 12% per annum as they have done over the past five years. and (b) not allocating funds for CR and ADR in 2013-14.3 9. future depreciation in the market price of gold and market value of investments in foreign securities. is that they have to tread a Economic & Political Weekly EPW october 18.08.6 11. the public at large ought to have access to the TC-II report. the buffers provided in the form of reserves (CR and ADR) too have to grow at this rate.