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'RBI's big transfer to Centre a 'one-off', may not sustain'

New Delhi: The size of Reserve Bank of India's (RBI) transfer of its surplus funds to the government is a "one-off" transaction and the bonanza may not sustain, Mumbai-based financial services company Edelweiss Securities said.

RBI's annual accounts released on Thursday revealed how the central bank was able to pay an enormous surplus of Rs 1.76 trillion (Rs 1.76 lakh crore) for the 2018-19 accounting period.

"A substantial part in the acceleration in the RBI's transfer to the government in 2018-19 are due to one-offs and the bonanza may not sustain, especially with regards to special dividend and forex accounting adjustment.

"From the government point of view, the effective surplus transfer for 2019-20, including the excess one-time capital transfer would be Rs 1.48 trillion (lakh crore), which is higher than the budgeted Rs 900 billion, implying net fiscal windfall of 0.28% of GDP", Edelweiss said.

According to the company, RBI's interest income has more than doubled in 2018-19. The increase was from both the domestic and foreign exchange (FX) assets at Rs 1.07 billion -- a gain of Rs 32 billion over the previous year.

The gain has resulted from higher coupon yields on rupee assets at 5.6%, against 5.2% in 2017-18, primarily amid significantly higher net purchase of Rs 3,311 billion -- largely Open Market Operation (OMO) purchases -- in 2018-19, while the Liquidity Adjustment Facility(LAF)/Marginal Standing Facility (MSF) operations also contributed.

There was decline in RBI repo pay-outs last year, as compared to 2017-18 which accumulated a demonetisation led-surplus. Foreign interest income, too, grew 33% amid general rise in yield and interest rates across all currencies, Edelweiss said.

There was also a dramatic Foreign 'other' income swing due to accounting change.

According to Edelweiss, the overall earnings from foreign sources grew to Rs 750 billion from 274 billion before, with the other income category growing 800% plus led by positive impact of Rs 214 billion accounting change to weighted average cost of holdings of FX capital gains and losses.

Special dividend transfer also added to the entire transfer kitty. "Of course the massive jump in other domestic income of Rs 862 billion comes majorly from special dividend paid from write-back of Contingency Reserve (Rs 526 billion)", it said.

The transfer was also aided by lower expenditure. This was largely owing to lower provisioning which has down down Rs 144 billion. No further provisioning was made on net profits.

The entire net income made during the year was transferred and no provisioning was made to add to the core capital, keeping in mind that the RBI's capital in 2018-19 stands at 23.3% of the balance sheet, according to Edelweiss.

Out of the total surplus of Rs 1.76 trillion, Rs 526 billion was identified as the excess capital provisioning to be transferred as a special dividend as per Jalan Committee's recommendations.

Adjusting for this, the RBI transferred the entire net income made in 2018-19 to the government -- Rs 1.23 trillion, out of which Rs 280 billion was already transferred as 2018-19 interim dividend.

"The base surplus dividend (Rs 1.23 billion) growth was a whopping 146% -- considerably higher than the past and thus needed some quick fact checks. We note in 2017-18 RBI's surplus was Rs 500 billion and during the demonetisation year it was just Rs 306 billion," the broking firm said.

"The additional fiscal kitty could be used to bridge the expected tax shortfalls or to further boost sector-specific expenditure by the government. That said, this bonanza appears one time and does not necessarily bode well in the medium term from fiscal stand point," it said.

In a future expansion of the RBI's balance sheet, the maintenance of contingent risk buffer (CRB or core capital) at 5.5% of the balance sheet, as accepted by the RBI board, would mean central bank's net profit will have to be adjusted accordingly before transferring to the government to ensure core capital grows in tandem with the balance sheet.

This will possibly imply lower future dividends for the government, Edelweiss said.