India ranks 2nd behind Turkey in share of central bank surplus transfers

MUMBAI: The Reserve Bank of India (RBI) was second behind Turkey in terms of reserves transferred to the government as a percentage of gross domestic product (GDP) for fiscal year 2020-2021. In FY20, the RBI ranked fourth in the surplus ratio as a percentage of GDP.
The central bank, however, said the transfer would not impact its operations.
Last month, the RBI transferred to the government a surplus of Rs 99,122 crore, 73% more than the Rs 57,128 crore paid in 2019-2020. “One aspect of the annual report that has raised a lot of heat and dust in the media is the surplus transferred to the government. Coming mainly from savings on balance sheet provisions and employee pension funds and others, the surplus is only 0.44% of GDP, ”the RBI said.

The RBI’s State of the Economy report said the surplus transfer ratio was low enough to allow the central bank to conduct monetary policy without fiscal dominance. The report said the surplus transfer rate was a measure of seigniorage – a term used to describe the profits the government makes by printing money. In other words, the difference between the face value of banknotes and its cost of production. The report cites research to point out that seigniorage between 0.5% and 1% of GDP allows the central bank to conduct monetary policy with a reasonable degree of independence.
The report also states that increasing the number of foreign exchange reserves can be misleading, and a better indicator of the vulnerability of the external sector is an assessment of indicators such as export coverage. “In terms of imports projected for 2021-2022, the current level of reserves covers less than 15 months, which is lower than that of the other main holders of reserves – Switzerland (39 months), Japan (22 months), Russia ( 20 months) and China (16 months).
Another reason India’s foreign exchange reserve position is misleading is that it coexists with a net international investment position of -12.9% of GDP. This means that India is a net recipient of foreign investment and if that money is withdrawn by investors, reserves can run out quickly.
At the beginning of June, the level of foreign exchange reserves exceeded 600 billion dollars. With this development, India is the fifth country holding reserves in the world, the 12th foreign holder of US Treasury securities and the 10th in terms of gold reserves.