Thread by @KirtanShahCFP

Let me explain the 1.76 lakh cr transfer 4m RBI to government

Its split into 2,

(A) 1.23L cr of dividends paid out from the profit of this year.

(B) 52K cr of capital paid out (Older profits accumulated n have become a large reserve of which 52,600 was paid out)
(1/n)

(A) Let’s first try and understand the 1.23 lakh cr dividend which is higher than the average dividend paid (60-65k cr.) over the last 5 years. How could the RBI afford to pay so much divided? (2/n)

So this year RBI made huge profits, how?
(a) Higher OMOs - RBI bought a lot of bonds from the markets to infuse liquidity in the system. When RBI owns more bonds, it received higher interest as income. (3/n)

(b) Repo - Because liquidity was tight, banks were also borrowing heavily from RBI and paying interest to RBI. This also increased RBIs income
(c) Printing cash - RBI printed 2.5 lakh cr cash. The printing cost was roughly 2.5 cr, everything else becomes profit. (4/n)

(B) Let’s now try and understand the 52,600 cr paid out of capital.

RBI has accumulated reserves (capital) of 10 lakh cr. of which 7 lakh cr is revaluation reserves and 3 lakhs is contingency reserves. (5/n)

What is Revaluation Reserves?
Notional profit. Assume RBI bought gold at 100 and today gold is 250 so RBI is making a 150 profit, this 150 is Revaluation Reserves. So all the profit on Gold, Dollars and Bonds bought by RBI becomes the Revaluation Reserves. (6/n)

What is contingency Reserve?
RBI keeps aside a small portion every year as a reserve to use in times of a crises. So tomorrow if we face a Lehman like crises, RBI can use this reserve revive an NBFC, Bank or lend to a MF. (7/n)

Jalan committee recommend RBI should have 5.5% - 6.5% of its balance sheet as contingency reserves (revaluation is not discussed as it’s only on paper). So 5.5% of 45 lakh cr (RBIs balance sheet) is some 2.45L cr. 3 - 2.45 ~ 52k cr was paid out from the contingency reserve. (n/n)

Content credit - @latha_venkatesh