High interest costs may force RBI to cut dividend to govt

Subject: Economy

Section: Monetary Policy

Context:

The Surplus available with the Reserve Bank of India for transfer or the RBI dividend to the Union government is likely to remain low in the current financial year ending March 2023 because of higher expenditure incurred by the central bank due to rising interest rates and higher costs in managing surplus liquidity in the system.
The lower dividend could be due to higher interest payments to banks which parked their surplus liquidity in the reverse repo window.
Other factors are,
losses on account of a fall in bond prices across the world are likely to impact the income of the central bank.
depreciation of rupee by over 10 per cent in the last 12 months.

Investment Revaluation Account Foreign Securities (IRA-FS)

Investment Revaluation Account Foreign Securities (IRA-FS) records the unrealized gains or losses on revaluation in foreign dated securities.
The balance in IRA-FS decreased from Rs 8,853.67 crore as on March 31, 2021 to (-) Rs 94,249.54 crore as on March 31, 2022 because of increase in yields across the maturities for all major markets.
When the yield goes up, the prices of the bond drop, leading to a loss in holdings.
However, this loss will be adjusted against the Contingency Fund.

Surplus transfer from RBI

The RBI, founded in 1934, operates according to the Section 47 (Allocation of Surplus Profits) Reserve Bank of India Act of 1934.
The act mandates that profits made by the central bank from its operations be sent to the Centre.
As the manager of its finances, every year the RBI also pays a dividend to the government to help with the finances from its surplus or profit.
A technical Committee of the RBI Board headed by Y H Malegam (2013), which reviewed the adequacy of reserves and surplus distribution policy, recommended a higher transfer to the government.

RBI’s Earnings:

Returns earned on its foreign currency assets, which could be in the form of bonds and treasury bills of other central banks or top-rated securities, and deposits with other central banks.
Interest on its holdings of local rupee-denominated government bonds or securities, and while lending to banks for very short tenures, such as overnight.
Management commission on handling the borrowings of state governments and the central government.

RBI’s Expenditure:

Printing of currency notes and on staff, besides the commission it gives to banks for undertaking transactions on behalf of the government across the country, and to primary dealers, including banks, for underwriting some of these borrowings.