Analyzing RBI’s Balance Sheet

RBI’s balance sheet for the year 2021-22 (FY22) has expanded by 8.4% as per its annual report released last week. While this is moderately higher than expansion of 7% in the previous year, it is significantly lower than 30% recorded in FY20. So, what has helped RBI manage its balance sheet expansion? Or for that matter, is balance sheet expansion a bad sign? Here is an attempt to analyze RBI’s balance sheet and answer these questions.  

RBI’s balance sheet stood at Rs 61.9 lakh crore at the end of FY22 against Rs 57.1 lakh crore last year. Its balance sheet consists of three major items on the liabilities side and two on assets side. The liabilities are equity capital & deposits, liabilities against notes issued and risk provisions. On the assets side are assets of currency issue department (ID) and assets of banking department (BD). Thus, only ID appears on both assets and liabilities side and all other liabilities are backed by assets of BD.

ID issues currency, which gets recorded in the balance sheet as liability and is bought by banks by payment of foreign currency which they receive from their operations. Thus, all the foreign currency that flows into the country are absorbed by the central bank. These dollars are invested back in international bonds/securities or deposited with IMF. RBI need not necessarily issue notes but can also give cash from its reserves, if it has, in exchange. The currency was lent to the government also in lieu of bonds called ‘deficit financing’ but was discontinued in 1997. For FY22, liabilities of ID dept increased from Rs 28.3 lakh crore to Rs 31.1 lakh crore, up by about 10%. This liability is backed by Rs 29.9 lakh crore of foreign bonds and Rs 1.2 lakh crore of gold.

The second item in the liabilities side is deposits, largely funds parked by banks as part of CRR or through other monetary instruments such as reverse repo. Total liabilities under this head rose from Rs 14.9 lakh crore to Rs 17.3 lakh crore, up 16%. This is on account of increase in CRR from 3.5% to 4% under which, banks are required to deposit funds with RBI. Of the total, deposits under reverse repo stands at Rs 7.8 lakh crore. Deposits under this head has risen sharply over last three years, from Rs 2.1 lakh crore at the end of FY19 as a result of surplus liquidity and low credit off-take.

The third item, risk provisions, is a unique feature of central bank’s balance sheet and requires considerable explanation. Two main items under this are revaluation reserves and contingency fund (CF). Revaluation reserve further comprises of currency and gold revaluation account (CGRA), Investment Revaluation Account-Foreign Securities (IRA-FS) and Investment Revaluation Account–Rupee Securities (IRA-RS). CGRA is an interesting concept used to manage gains/losses arising out of change in price of gold and change in exchange rate. An example would better illustrate this. Assume RBI had absorbed $100 bn when exchange rate was Rs 50 per dollar. The value of this investment would stand at Rs 75*100 bn in FY22, implying an unrealized gain of Rs 25*100 bn. As per the practice, RBI would have to show assets of Rs 75*100 in its account books (and not Rs 50*100). The impact of rise in gold prices is also the same. So, 100 tons of gold purchased at Rs 20,000 per 10 gms would imply an unrealized gain of Rs 100*(500-200) crore. As per the Annual report, RBI holds 760 tons of gold, a good part of which was purchased when gold prices were less than Rs 20,000 per 10 gms.

However, it cannot take these gains to income statement as these are unrealized and can get eroded if rupee appreciates or gold prices come down. To balance its balance-sheet, it creates a corresponding liability as CGRA. Similarly, any increase in price of foreign or domestic bonds (as a result of decline in yield) leads to gain in value of these investments which are recorded as IRA-FS & IRA-RS. All the three items 9and a few more smaller ones) are clubbed under revaluation reserves. There is yet another fund called contingency fund (CF), an emergency fund mandated by RBI Act and receives funds from RBI’s profit & loss account.

For FY22, CGRA rose from Rs 8.6 lakh crore to Rs 9.1 lakh crore due to increase in gold prices and rupee depreciation. It may be noted that CGRA balance had declined in FY21 due to drop in gold prices and rupee appreciation. IRS-FS reserves have seen interesting movement over last few years. It rose from 16,000 crore at the end of FY19 to Rs 54,000 crore in FY20 due to global monetary policy easing which brought down yields and led to increase in bond prices. However, bond prices have again increased over last two years with monetary tightening. As a result, reserves have declined from Rs 53,000 crore at the end of FY20 to Rs 8,800 crore in FY21 and to negative Rs 94,000 crore now. Since the reserve can’t be negative, it is adjusted by transfer of funds from CF reserves. To make up for this decline in CF and to meet statutory requirement, RBI transferred Rs 1.15 lakh crore from its profit & loss account, up sharply from only Rs 20,000 crore in FY21. As a result, surplus available with RBI to be transferred to central government declined from Rs 99,000 crore in FY21 to Rs 30,000 crore in FY22.

Endnote – RBI earned income of Rs 81,600 crore from its overseas investment implying an interest rate of 2.11%. Earnings have moved from a low of 1.1% in FY18 to 2.65% in FY19 and has come down marginally since FY20.