The central bank, however, said that the transfer will not impact its operations.
Last month, the RBI transferred a Rs 99,122-crore surplus to the government — 73% higher than the Rs 57,128 crore paid out in 2019-20. “An aspect of the annual report that has raised considerable heat and dust in the media is the surplus transferred to the government. Mainly stemming from saving on balance sheet provisions and employees’ superannuation and other funds, the surplus constitutes just 0.44% of GDP,” the RBI said.
The State of the Economy report published by the RBI said that the surplus transfer ratio was low enough to enable the central bank to conduct monetary policy free of fiscal dominance. The report said that the surplus transfer ratio was a measure of seigniorage — a term used to describe profits the government makes by printing currency. In other words, the difference between the face value of currency notes and its production cost. The report quotes research to point out that seigniorage between 0.5% and 1% of GDP allows the central bank to conduct monetary policy with a fair degree of independence.
The report also says that the surge in the number of foreign exchange reserves can be deceptive, and a better gauge of external sector vulnerability is an assessment of indicators like the export cover. “In terms of projected imports for 2021-22, the current level of reserves provides cover for less than 15 months, which is lower than for other major reserve holders — Switzerland (39 months), Japan (22 months), Russia (20 months), and China (16 months).
Another reason why India’s forex reserve position is deceptive is that it co-exists with a net international investment position of -12.9% of GDP. This means that India is a net recipient of foreign investment and should this money be withdrawn by investors, the reserves can deplete fast.
In early June, the level of foreign exchange reserves crossed $600 billion. With this development, India is the fifth-largest reserve-holding country in the world, the 12th-largest foreign holder of US Treasury securities and the 10th-largest in terms of gold reserves.