Express press service
It’s a pandemic year, but unlike other central banks, the Reserve Bank of India (RBI) has resisted deficit monetization and aggressive balance sheet expansion. In FY21, its balance sheet grew by a modest Rs 3.5 lakh crore compared to an unprecedented expansion of Rs 12 lakh crore seen in FY20 (including months of peak of the first wave of the pandemic: March-June 2020). But the figures are not strictly comparable since the RBI presented a truncated nine-month balance sheet (July 2020-March 2021) aligning its accounts with public finances, which follow a cycle from April to March for the fiscal year.
Previously, the RBI followed a July-June cycle. Based on RBI’s assets and liabilities published weekly, in absolute terms, the central bank’s balance sheet rose from Rs 53.3 lakh crore in June 2020 to Rs 56.8 lakh crore in March 2021. Weekly data is generally believed to be accurate, although final figures will be presented in the forthcoming annual report.
In percentage terms, the toll stands at 29% of GDP, the highest in recent times, but this is largely due to the contraction in GDP seen last year. Like other major central banks that have adopted expansionary liquidity policies to tackle the pandemic, the RBI was also initially aggressive, mopping up bonds and building up foreign exchange reserves. But gradually he settled for the conservative expansion of forex assets.
As in March 2021, they stood at Rs 39.3 lakh crore, or 69% of RBI’s total assets. Compared to last year the net addition is only around Rs 3.7 lakh crore. Forex assets are considered the best way to expand balance sheets, but it could be a strain on the currency and are also low yielding given global interest rates close to zero. Likewise, even though the RBI bought bonds aggressively initially, the total expansion of bond holdings between June 2020 and March 2021 is not noticeably excessive at Rs 1.6 lakh crore.
This, despite the waning appetite of bondholders and a growing chorus for direct monetization (a method where RBI buys bonds directly from the government rather than from financial intermediaries, and prints money). Governor Shaktikanta Das has stood firm, perhaps because direct monetization permanently widens the balance sheet and has its own drawbacks. Instead, he opted for unconventional open market operations, taking a temporary spike in the balance sheet.
To counter the increase in assets (bonds in this case), RBI must increase its liabilities by an equivalent amount by printing change, which is part of the reason for the rise in currency in circulation, which is at an all time high at around Rs 29 lakh crore. This may not be entirely due to the Indian ‘money rush’, as currency withdrawals reduce both bank deposits and statutory CRR balances (which banks deposit with the RBI) . But last year the former rose 11.5% while the latter remained unchanged at Rs 5-6 lakh crore.
All new notes issued must be backed by currency assets or gold, which also partly explains the massive surge in foreign exchange assets, both in FY20 and FY21. So here’s the trick. The unusual purchase of bonds involves directly or indirectly the printing of money, on which RBI earns seigniorage, while also collecting interest on the bonds and securities it holds. Both will eventually roll over as surplus transfers to the government, which may explain Friday’s unexpected dividend windfall of Rs 1 lakh crore.