Last week’s big jump in the Reserve Bank of India’s (RBI) annual dividend payment to the government must have pleased the Center as it looks to squeeze every source of inflows to keep its massive social and development spending going. The board of RBI approved the transfer of A. 87,416 crore “surplus” for the financial year 2022-23. it’s about three times 30,307 crore was sent to it throughout the last year. To the extent that this money helps the government control its market borrowings, it will ease pressure on debt market yields and free bank credit for private productive purposes. Interestingly, the RBI has paid such a huge amount despite increasing the contingency risk buffer, which should always be maintained at 5.5% to 6%. This was enabled by currency-operational gains made on the back of heavy US dollar selling in support of the rupee’s exchange value. It was intended to keep volatility under control, but it also gave our central bank a lump sum reward in a war-torn year. Latest RBI data shows it sold more dollars than it bought in 2022-23 compared to the previous two years. Its total sales for the year were slightly more than $25.5 billion from purchases of approximately $187.1 billion.
Currency movements explain why this was needed. The dollar rose against most other national currencies following Russia’s invasion of Ukraine and US interest rate hikes, both of which attracted global investors to the relative safety of US Treasuries, which eventually began to yield higher and better yields. Coupon rates offered. Even more generally, dollar assets gained appeal. Outflows from India meant stronger rupee demand for dollars, and the rupee weakened by about 8%. $76 for some in early 2022-23 82 by the end of the year. Considering that the average annual depreciation of our currency was about 3%, this was very high. As the RBI’s managed-float policy required it to reduce short-spurt volatility for macro stability but not change the long-term trend of the conversion rate, the rupee continued to depreciate – supported by foreign exchange reserve sales. Smoothing was aimed, that’s all. Since that stash was accumulated over an extended period of large inflows, the dollars unloaded by the RBI would likely have been bought at a time when the US greenback was very cheap. In other words, an unusual year generated an extraordinary bonus. As the trend is that we as a country invest more than we save, a repetition of such situations cannot be wished for.
Broadly speaking, the Indian economy seems to have weathered the various post-Covid pressures relatively well. Barring another setback, the RBI could again be a net buyer of the dollar this year as the rupee’s demand for dollars improves. This will partly depend on how attractive local equity assets are. Last year saw a decline in foreign direct investments after a decade of boom, but they remained above $70 billion. Furthermore, the US Federal Reserve’s sharp rate cut is likely to stabilize soon, as may the RBI’s on-pause, so the rate-gap effect will lose further force. Importantly, the Center keeps its expectations of RBI payments to a minimum. These should not be seen as fiscal reforms for an extended period of time. There should not be an iota of pressure on the central bank to make profits. It is good that its gains will help the fiscal balance of the Centre, but the RBI’s goals are very complex and it is important to minimize the risk. A central bank with a large surplus does little to aid our economy compared to the one that keeps the real value of our money stable and assures us of broad macro stability on other fronts. We must focus on the fundamentals of sustainable economic development.
catch all business News, market news, today’s fresh news events and Breaking News Update on Live Mint. download mint news app To get daily market updates.
Updated: May 25, 2023, 01:45 AM IST