RBI’s balance sheet for the year 2019-20 (July’19-June’20) has expanded by massive 30%, the highest in possibly over a decade. However, it hasn’t happened because it made huge profits, which, anyway, it has to pass-on to central government as dividend. And it has also not happened because it has printed more currency notes, whose share in total balance sheet has actually declined. So, how has that happened? Here is an attempt to understand that.
First the big picture. RBI’s balance sheet stood at Rs 53.3 lakh crore at the end of FY20 (30th June’20), 30% higher than the figure of Rs 41.0 lakh crore last year. The increase contrasts with increase of 9.1% CAGR during FY15-19. So, what has happened this year?
RBI’s balance sheet consists of two parts – currency issue department (ID) and banking department (BD). ID issues currency, which enters the balance sheet as liability, and is released to banks. In lieu of this, banks give foreign currency or gold which they receive from their operations. (The currency was lent to the government also in lieu of bonds but the practice has been discontinued since late 1990s). 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).
For FY20, size of ID increased from Rs 21.7 lakh crore to Rs 26.3 lakh crore, up by 22%. Most of this is against foreign bonds which rose from about Rs 21 lakh crore to over Rs 25.2 lakh crore whereas gold held against currency issued rose from Rs 0.8 to Rs 1.1 lakh crore. While the size of ID has also risen quite disproportionately, primarily due to large inflow of forex, it is only a small part. It is the assets of BD which has risen by 40%, from Rs 19.2 lakh crore to Rs 26.9 lakh crore which has really swelled RBI’s balance sheet. So how has that increased?
BD’s assets include four major components – forex reserves (held as foreign govt bonds), central govt bonds, gold and loans to banks. Most important of these are forex and gold from the perspective of current discussion. The reason why its balance sheet swells is that the value of its forex reserves keeps increasing as the rupee depreciates. For instance, assume RBI had absorbed $100 bn when exchange rate was Rs 50 per dollar. The value of this investment would stand at Rs 70*100 bn in FY20, implying an unrealized gain of Rs 20*100 bn. As per the accounting convention, RBI would have to show assets of Rs 70*100 (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 over 660 tons of gold, a good part of which was purchase before 2010 when gold prices were less than Rs 20,000 per 10 Gms. Yet another factor that increases the value of RBI’s assets is change in interest rate. The softening interest rate last year has led to significant appreciation in value of bonds held by RBI.
As per the annual report, RBI’s total forex reserves on account of currency and investment revaluation have risen from close to Rs 7 lakh crore to over Rs 10.2 lakh crore whereas the value of gold reserves has increased from Rs 88,000 crore to Rs 1.4 lakh crore. The two items, together, have risen by as much as 49% during the year!
However, RBI cannot take these gains to the profit & loss statement as these are unrealized and can get eroded if rupee appreciates, gold prices come down or interest rate starts increasing. To balance its balance-sheet, it creates a corresponding liability under the head “currency & gold revaluation account (CGRA)” for the first two items. Liabilities under CGRA stands at Rs 9.8 lakh crore, 47% increase over last year! Change in value of bonds are accounted as liability under Investment Revaluation Account-Foreign Securities (IRA-FS) and Investment Revaluation Account–Rupee Securities (IRA-RS). Total liability under these moved up from Rs 65,000 crore to Rs 1.5 lakh crore during the year, increase of over 100%.
Beyond these, there is another component of its balance sheet, related to its money market operations, that deserves attention. While one set of banks are flush with funds because of high deposits and low credit off-take, there is another set which is short of funds. With general increase in risk aversion, banks prefer parking their funds with RBI rather than inter-bank lending. During FY20, RBI absorbed as much as Rs 5 lakh crore through reverse repo (which is added on the liabilities side of balance sheet), whereas it also lent close to Rs 2.3 lakh crore through repo transaction (added to assets). As a result, reverse repo deposits with RBI moved up sharply, from Rs 2.1 lakh crore to Rs 7.1 lakh crore whereas repo loans increased from Rs 57,000 crore to Rs 2.9 lakh crore. (The excess in liability is balanced by reduction in other liabilities or increase in government bonds held by RBI and doesn’t affect the size of balance sheet).
- RBI’s balance sheet increases due to issue of fresh currency notes.
- It also increases due to depreciation of rupee which increase the value of forex reserves and gold held by it.
- The balance sheet also swells with increase in nominal value of bonds held by it, because of decline in interest rate.
- None of the increase is taken to income statement but are added to the balance sheet with a corresponding increase in liabilities.
Below is the excel sheet with key figures.