RBI Is Hoarding Too Much Capital And Can Pay A Chunk To The Govt: Deepak Shenoy

If Institutions Like RBI Hoard Excess Capital, That Means The Government Will Keep Increasing Our Taxes For Revenue.

The government’s asking the RBI for money, and saying it has too much capital. The conversations around this are of this sort:

Oh man the government is undermining the RBI independence by taking away its money

The government will steal all the reserves from RBI.

What’s the funda?

The government wants a piece of what RBI has been squirreling away for years out of its profits. We’ll examine why.

RBI makes a profit. It invents money. Mostly out of thin air, but given it’s in Mumbai, the air is more likely to be thick.

Haha. But really, how does it make money?

It makes money when banks take rupees from it through the “repo” window, for an overnight transaction. So, technically it prints money and earns interest on it, and then takes that money back in. This is called Seigniorage but if we’re changing city names can we please do something about such terms also. It might lose money as well, if banks don’t borrow from it and instead, park money with it and ask for reverse-repo interest.

Every rupee printed is a liability for the RBI – even in rupee notes, you’ll see the "We promise to pay the bearer the sum of…" – it’s a note saying the RBI owes you money. An asset for you, a liability for the RBI.

Wait. If the printed rupee is a liability, where are the assets?

Now the asset side contains, partly, government bonds – they pay interest. That interest is a profit for the RBI. (FY18 – they had about 6.9 lakh crore worth of government bonds, and made about Rs 48,000 crore as interest from that alone).

Also on the asset side is massive set of forex reserves. There’s also interest from “foreign” sources – they own US treasury bills/bonds as their forex holdings. Even if that pays 1%, they have $400 billion, so they’ll made around $4 billion a year. Last year, they made about Rs 23,000 crore from that too.

This adds up to a lot of money – in FY18, they made Rs 78,000 crore in income.

How much of that is profit?

The RBI doesn’t really need to spend money. It does pay salaries of about Rs 3,800 crore and spends on printing of notes (about Rs 5,000 crore), and then pays some commissions. If you add all of that up, it’s not too much in comparison.

In FY18, RBI spent about Rs 14,000 crore in the year.

And then they added some “provisions” of 14,000 crore more. So they spent 28,000 crore including provisions. And then said the profit after that was 50,000 crore and paid it out to the government.

Why’s the government cribbing? It got its 50,000 crore, no?

Because it’s not apparent why the RBI should be putting so much in “provisions”.  But first, let’s take a look at the RBI Balance Sheet:

As you can see, the forex assets, gold and rupee government bonds are on the asset side of the balance sheet, which is about Rs 36 trillion, or Rs 36 lakh crores.

The liability side consists:

all the rupees ever printed (about 19 lakh crore)

bank deposits as banks are required to keep CRR with RBI (Rs 6.5 lakh crore)

and then a set of “provisions” (Rs 10 lakh crore)

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