Reserve Bank expenditure doubles on remonetization

The Reserve Bank of India (RBI) has incurred massive expenditure from the demonetization exercise. The total expenditure of the central bank increased 107.84% to Rs 31,155 crore in 2016-17, primarily due to an increase in expenditure on the printing of new notes as part of remonetization of currency and provisions.

The costs of printing new currency were Rs 7,965 crore, about 133% higher than the cost the central bank incurred in the previous year when it had spent just Rs 3,421 crore. “Supply of notes during the year at 2,904.3 crore pieces was 37% higher than the total supply during the previous year. Supply of higher denomination notes during 2016-17 was 1,370.2 crore pieces, higher by 160%,” RBI's annual report, which was unveiled on Wednesday, said.

This further pushed up the provision for payables by Rs 684 crore to Rs 3,917 crore as on June 30, 2017, due to higher provisions on outstanding expenditure for printing of notes.

It is the increased expenditure and lower returns for its investments which contributed to RBI transferring just Rs 30,659 crore as dividend to the government, less than half of Rs 65,876 crore in the previous fiscal.

After a three-year pause, RBI also put aside Rs 13,140 crore to replenish its contingency fund to cushion any liabilities that it may have in future.

Managing the excess liquidity that banks deposited with the central bank also came with a pinching cost that resulted in a 17.11% decline in its net income for 2016-17 to Rs 43,232 crore (from Rs 52,157 crore) in the previous financial year due to higher expenditure on managing liquidity.

Interest on holding of rupee bonds increased by 25.85% from Rs 43,079 crore in 2015-16 to Rs 54,217 crore in 2016-17, that is the money that the central bank used to buy up securities from the banks to mop out the excess deposits of Rs 15.28 lakh crore that flooded into the banking system as people returned the demonetized notes.

The switch from non-interest bearing currency liabilities like government bonds to interest bearing deposits that the banks deposited with the central, coupled with a decline in the Reserve Bank’s credit to banks led to denting of its surplus. Usually, RBI lends money to banks under the repo window which also came to a standstill as banks were not borrowing during the two months of demonetization.

A comparison of the RBI’s balance sheet size pre- and post-demonetisation shows a decline of Rs 80,000 crore (2.4 %) during November 4, 2016, through March 31, 2017, as against an increase of Rs 4.7 lakh crore (16.1%) in the corresponding period a year ago.

The RBI annual report also shows that the income from income from foreign sources decreased by 35.27% from Rs 28,713 crore in 2015-16 to Rs 8,586 crore in 2016-17 mainly on account of the appreciation of the rupee and reduced premium income on the swaps that are in the nature of repo.

The net income from domestic sources decreased by 17.11% from Rs 52,157 crore in 2015-16 to Rs 43,232 crore in 2016-17 mainly due to higher net expenditure on interest under liquidity adjustment facility (LAF) on account of absorption of surplus liquidity in the banking system post withdrawal of Specified Bank Notes.

...& ANALYSIS

• Its income from foreign sources fell 35.27% from  Rs 28,713 crore in 2015-16 to Rs 8,586 crore in 2016-17
   
• The net income from domestic sources decreased by 17.11%
   
• It is due to higher expenditure on interest under LAF