RBI Annual Report: Central Bank's FY23 Income Rise To Rs 2.35 Lakh Crore On Provisions, Forex Gains

The RBI saw a gain of Rs 1.03 lakh crore from foreign exchange transactions allowing it to increase the size of its contingency fund. At the same time, the bank made a provision of Rs 1.31 lakh crore

The Reserve Bank of India's (RBI) net income rose to Rs 2.35 lakh crore in the fiscal year 2022-23, from Rs 1.6 lakh crore in the previous year on higher forex gains, according to the central bank's annual report released on Tuesday. The RBI saw a gain of Rs 1.03 lakh crore from foreign exchange transactions allowing it to increase the size of its contingency fund. At the same time, the central bank made a provision of Rs 1.31 lakh crore, up 14 per cent from 2021-22. 

The RBI annual report said, "The size of the Reserve Bank’s balance sheet increased by 2.50 per cent for the year ended March 31, 2023. While income for the year increased by 47.06 per cent, the expenditure increased by 14.05 per cent. The year ended with an overall surplus of Rs 87,416.22 crore as against Rs 30,307.45 crore in the previous year, resulting in its increase of 188.43 per cent."

The RBI transferred a larger dividend of Rs 87,416 crore to the central government, surpassing the planned amount.

The balance sheet of the Reserve Bank plays a critical role in the functioning of the country’s economy, largely reflecting the activities carried out in pursuance of its currency issue function as well as monetary policy and reserve management objectives. 

The size of the balance sheet increased by Rs 1,54,453.97 crore, i.e., 2.50 per cent from Rs 61,90,302.27 crore as on March 31, 2022 to Rs 63,44,756.24 crore as on March 31, 2023. The increase on the asset side was due to a rise in foreign investments, gold, and loans and advances by 2.31 per cent, 15.30 per cent, and 38.33 per cent, respectively, RBI said. 

On the liability side, the expansion was due to an increase in notes issued, revaluation accounts, and other liabilities by 7.81 per cent, 20.50 per cent, and 79.07 per cent, respectively. Domestic assets constituted 27.69 per cent while the foreign currency assets and gold (including gold deposit and gold held in India) constituted 72.31 per cent of total assets as on March 31, 2023, as against 28.22 per cent and 71.78 per cent, respectively, as on March 31, 2022, the Reserve Bank noted.

According to a report by MoneyControl, in recent years, the RBI has significantly increased its provisions. In the financial year 2021-22, the provisions rose five-fold to Rs 1.15 lakh crore due to the impact of rising global interest rates. When interest rates rise, the value of fixed-income investments, such as bonds, tends to decrease, prompting the RBI to set aside more funds to cover potential losses.

In the following financial year, 2022-23, interest rates continued to rise, which led the RBI to reduce the estimated value of its holdings of foreign securities. This adjustment was necessary to reflect the decrease in the market value of these securities due to the higher interest rates. As a result, the RBI's Investment Revaluation Account for Foreign Securities (IRA-FS) ended up with a negative value of Rs 1.65 lakh crore as of March 31, 2023, the report noted. 

"As per the extant policy, the debit balance of Rs 1,65,488.93 crore in IRA-FS was adjusted against the CF (Contingency Fund) on March 31, 2023 which was reversed on the first working day of the following year. Accordingly, the balance in IRA-FS as on March 31, 2023 was Nil," the RBI said in its annual report.

In 2018-19, the RBI adopted a new Economic Capital Framework, under which it is required to maintain a contingency risk buffer of 5.5-6.5 per cent of its balance sheet. The new framework also allows the central bank to benchmark sales of foreign exchange to its historical average cost of acquiring these reserves, allowing it to realise gains on foreign exchange transactions during the year.

The Contingency Fund is a reserve set up by the RBI to handle unexpected and unforeseen events or risks. This includes situations like a decrease in the value of securities, risks related to monetary and exchange rate policies, and systemic risks. In the financial year under consideration, the RBI's provision accounted for a significant portion, 88 percent, of its total expenditure. This provision serves as a cushion to address any financial challenges that may arise unexpectedly.

The RBI sold a record amount of foreign currency in 2022-23 as it tried to bring down volatility in the rupee's exchange rate following the turmoil that roiled global financial markets after Russia's invasion of Ukraine. The rupee also came under severe pressure last year due to a sharp rise in the import bill as a global surge.

The RBI earns a profit whenever it sells foreign currency. This profit is calculated by taking the difference between the selling price of the foreign currency and the average cost at which the RBI acquired that currency in the past. During the financial year 2022-23, the Rupee's monthly exchange rate against the US dollar fluctuated between 76.2 and 82.7 on average. These exchange rate variations determine the value at which the RBI sells its foreign currency holdings and, subsequently, the profit it earns from those transactions.