RBI’s Surplus Transfer and Financial Dynamics: An In-Depth Analysis

 The Reserve Bank of India's (RBI) surplus transfer of ₹2.1 trillion in FY2024 was notably facilitated by a significantly lower provision of ₹428 billion compared to ₹1.3 trillion in FY2023. Looking ahead to FY2026, we project that the surplus transfer could be at least as substantial as this year’s figure. Depending on various scenarios involving interest income on foreign exchange (FX) assets and reduced losses from investment revaluation, this transfer could potentially increase by 0.1-0.5% of GDP. This projection also factors in lowering the Available Realized Equity (ARE) to 6%.

RBI’s Balance Sheet Expansion

In FY2024, the RBI's balance sheet expanded by 11.1% over the previous year, reaching ₹70.5 trillion (see Exhibit 1). This growth was driven by several key factors:

1. A 30% increase in loans and advances to the central government through Ways and Means Advances (WMA) and Overdrafts (OD), state governments via special drawing facilities, and financial institutions through funds availed under the Liquidity Adjustment Facility (LAF) amid low system liquidity and an increase in reverse repo transactions.
2. A 14% increase in foreign investments.

On the liabilities side, significant increases were noted:

1. A 27% increase in deposits to ₹17.2 trillion, fueled by a rise in Net Demand and Time Liabilities (NDTL) of banks, increased repo transactions by financial institutions outside India, and reverse repo deposits with the RBI.
2. A 22% increase in the contingency fund to ₹4.3 trillion.

Income Sources and Provisions

The RBI’s total income in FY2024 rose to ₹2.8 trillion from ₹2.4 trillion in FY2023, marking a 17% year-over-year increase. Foreign income contributed significantly to this increase, jumping 23% to ₹1.9 trillion from ₹1.5 trillion, driven by higher interest income of ₹1 trillion compared to ₹603 billion in FY2023. Domestic income also saw a modest rise of 5.7%, reaching ₹881 billion, mainly due to a lower net outgo of interest under LAF/MSF/SDF.

Lower provisions were a key factor in the increased surplus transfer to the central government. Provisions fell to ₹428 billion from ₹1.3 trillion in FY2023, influenced by:

1. Reduced losses on the Investment Revaluation Account (IRA), which dropped to ₹1.5 trillion from ₹1.85 trillion in FY2023. These losses are debited from the contingency fund at the end of the financial year.
2. An increase in Available Realized Equity (ARE) to 6.5% of the balance sheet, up from 6%.

Future Projections and Implications

Looking forward to FY2026, we anticipate that interest earnings will likely be higher than the current year, owing to delays in the global rate cut cycle, particularly in the US. Additionally, we expect lower losses on the IRA due to fewer capital losses in the investment book. However, earnings from FX sales might be lower compared to FY2024, given limited opportunities for FX sales operations. Nonetheless, we believe that the surplus transfer in FY2026 could at least match FY2025 levels and potentially increase by 0.1-0.5% of GDP, depending on various interest income scenarios on FX assets and lower investment revaluation losses. Lowering the ARE to 6% could also aid in reducing the Gross Fiscal Deficit (GFD)/GDP to 4.5% by FY2026.

Key Takeaways from RBI’s Annual Report

1. Productivity and Digitalization in India The impact of digitalization on productivity is assessed through two channels: the role of ICT as an input in driving output and labor productivity growth, and by examining the productivity potential between ICT and non-ICT sectors.

   • ICT capital services' contribution to output growth rose from 5% during 1981-90 to 13.2% during 1992-2023.
   • ICT capital deepening’s contribution to labor productivity growth increased from 8.4% to 15.3% over the same period.
   • The ICT sector's productivity consistently outperformed the non-ICT sector from 1980 to 2020, although the recent period (2010-20) shows signs of a productivity paradox, reflecting uneven access to digital technologies and slow diffusion of technology benefits.

2. Dynamics of Inflation Surges in India A study on inflation surges using a regression-based event study framework reveals that:

   • In India, core inflation typically returns to its pre-surge level within a year in the absence of overlapping shocks. However, headline inflation convergence is hindered by volatility in food prices.
   • Analysis of pre-FIT (1995-2016) and post-FIT (2017-23) periods shows a change in the pattern of inflation convergence, particularly for core inflation. While the timeline for returning to equilibrium remains similar, the magnitude of core inflation increases has decreased, indicating more anchored inflation expectations and effective monetary policy actions.

This comprehensive analysis underscores the RBI's robust financial management and strategic foresight in maintaining economic stability while navigating complex global and domestic financial landscapes.