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RBI WATCH

RBI accounting yr change not at best time for govt

 

By Siddharth Upasani

Less than a year after the central board of the Reserve Bank of India accepted the recommendations of the Bimal Jalan-led expert committee on the central bank's economic capital framework, the shift to a new accounting year has begun.

Friday, the RBI's board met, with a statement from the central banks saying "the budget for the next accounting year July 2020 to March 2021 (aligned with the Government’s financial year)" was discussed.

With The Alignment Of The RBI's Accounting Year With The Government's, The Need For An Interim Dividend Would Be All But Eliminated.

Naturally, a nine-month adjustment period is needed to shift the RBI's financial year to Apr-Mar from Jul-Jun.

The Jalan committee favoured a shift in the RBI's accounting year to Apr-Mar for a variety of reasons. One, it would "obviate any timing considerations that may enter into the selection of OMO/MSS as monetary policy tools". Second, there would be greater cohesion to the RBI's monetary policy projections and reports, some of which followed the Apr-Mar schedule.

Finally, the same accounting year for the government and the RBI would not only allow the central bank to give more robust estimates of its surplus to the Centre but also "reduce the need for interim dividend being paid by the RBI".

For the last few years, the government has approached the RBI in the first quarter of the calendar year for an advance on that financial year's surplus--which would normally be paid in late August once the central bank's board approved the accounts for the 12 months ended Jun 30--before the end of March. While this demand for an interim dividend coincided with deterioration in the government's finances, the difference in the accounting years meant the 'lag' in payment of the RBI's surplus coincided with a period where the Centre's revenue-expenditure mismatch was at its worse: Apr-Jun.

With the alignment of the RBI's accounting year with the government's, the need for an interim dividend would be all but eliminated. However, the shift to the new year could not have come at a worse time for the government.

The RBI's surplus is a major revenue source for the government, even more so following the acceptance of the Jalan committee's recommendations, which suggested revised norms for the calculation of economic capital. Not only did that result in the one-off transfer of 526 bln rupees of excess provisions in August, the annual surplus of 1.23 trln rupees was also nearly twice as much as the previous record. And the Jalan committee expected the trend of higher-than-usual surplus transfers to continue, with its forecast for the net revenues of the RBI indicating a surplus of anywhere between 682 bln rupees and 976 bln rupees for 2020-21.

While finances of governments across the world will weaken in 2020 like never before, some improvement will be required in 2021. Not only will the excess liquidity conditions hit the RBI's revenues, any surplus will be for only nine months, making the 2021-22 fiscal math for the government even more difficult.

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POLICY RATES

============

Repo Rate: 4.00%

Reverse Repo Rate: 3.35%

Cash Reserve Ratio: 3.00%

Bank Rate: 4.25%

Marginal Standing Facility Rate: 4.25%

Statutory Liquidity Ratio: 18.00%

 

End

 

Edited by Arshad Hussain

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