Active trading saved RBI from seeking extra capital

The Reserve ‘s active trading in the market helped it avoid seeking capital from the government to meet prescribed levels, analysts said.

If not for its sell/buy swaps in the currency market and conversion of revaluation gains into realised profits, the central bank’s capital levels might have fallen below those prescribed by the Bimal Jalan committee, they said.

The RBI reduced its balance sheet by over Rs 1.6 trillion during March 2022, largely through use of foreign currency sell/buy swaps. This helped it reduce the need for economic capital by over Rs 330 billion.

“Without this timely reduction of the balance sheet, and without the active conversion of Rs 780 billion of revaluation gains into realised profits through its market operations through the year, the RBI would have required a net capital injection from the government to comply with the Bimal Jalan committee recommendations,” said Ananth Narayan, associate professor at S P Jain Institute of Management and Research.

The central bank transferred 69.4% less to the government last fiscal at Rs 30,307.45 crore, against Rs 99,122 crore in 2020-21.

This was also lower than what was estimated in the Union Budget, impacting the government’s fiscal math in the process.

Gains from forex transactions increased to Rs 690 billion in FY22 from Rs 506 billion in the previous fiscal. Gross dollar sales in the spot market rose to $96.7 billion from $85 billion in FY21. This also included two USD-INR swaps of $5 billion each – sell-buy swap on March 8 and buy-sell swap maturing on March 28.

Under its Economic Capital Framework introduced in 2019 as recommended by a committee headed by former RBI governor Bimal Jalan, the accounting practice of the central bank’s foreign exchange operations was changed to historical cost from earlier practice of week-to-week cost.

“Hence, the large quantum of dollar sale and historical cost accounting practice would result in large gains in foreign exchange transactions,” said Gaura Sengupta, chief economist at

. “We calculate the historical cost of gross dollar purchase at Rs 59.6.”

The Jalan panel had recommended that the RBI maintain realised equity at a minimum of 5.5% of assets, and economic capital (realised equity plus revaluation reserves) at a minimum of 20.8% of assets.

While realised equity is at the recommended minimum level, economic capital is slightly lower at 20.6% of assets.

The RBI did have to separately absorb net mark-to-market losses of Rs 942 billion from its foreign currency bond holdings into realised equity. This dip in equity was partly offset by the central bank converting Rs 780 billion of revaluation gains into realised profit and loss, by sale of foreign exchange and bonds in secondary markets.

Some economists said the central bank’s attempt to maintain orderly currency movements also helped. “The forex operations are to curb volatility in the market and strike a balance between retaining export competitiveness and ensuring orderly depreciation,” said Madan Sabnavis, chief economist at

. “In this process, it has helped its balance sheet though this is not the motivation.”

Net OMO (open market operations) purchases by the RBI amounting to Rs 2.1 trillion in FY22 also helped, experts said. This led to an increase in interest income from holdings of G-secs to Rs 964 billion in FY22 compared to Rs 598 billion in FY21.

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