The Reserve Bank’s surprise rate cut may bring cheers for many, but it may create pressure on its own surplus fund for next accounting year. Though it has justified the reduction, saying consumer inflation is likely to be at 5.8 per cent, below the 6 per cent target for January, the central bank’s profit may hit some way or the other in the coming July-June cycle.
The RBI has cut its repo rate by 50 basis points on Tuesday, bringing the repo rate down to 6.75 per cent which is the lowest it has been at in the last 4.5 years and it has cut its lending rate 4 times this year. As compared to the BRICS nations - Brazil, Russia, India, China and South Africa, Brazil’s cetral bank’s rate is maximum at 14.25 per cent while China’s the lowest to 4.60 per cent. As far India is concerned it has given the rate cut move is at par with China and South Africa.
Repo rate is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds, while reverse repo rate is the rate at which the central bank of a country (RBI in case of India) borrows money from commercial banks within the country.
But RBI Governor Raghuram Rajan said, “With the rate cut, the focus should now shift to bringing inflation to around 5 per cent by March 2017 and the central bank will be vigilant for signs of monetary policy adjustments that are needed to stick to the ‘deflationary path.”
“With rate 4 times rate cut this year, the central bank may see a hit in its own rofit in the coming accounting year,” said an expert on monetary policy of India.
As far surplus of funds are concerned, the central bank follows a July-June accounting year. When it transfers its entire fund to the Government, which is battling to keep its fiscal deficit under check, it considers it as a welcome gift, but finally the RBI takes a hit its balance sheet in some way or the other.
The RBI had said last month it would transfer a surplus of Rs65,896 crore for 2014-15 to the Government of India, which is about 25 per cent more than the amount transferred in 2013-14. The Central Board of Directors approved the transfer for the year ended June 30, 2015. The central bank follows July-June accounting year. The RBI had transferred a surplus of Rs52,679 crore for year ended June 30, 2014.
The RBI generally transfers almost its entire surplus to the Government, against the usual practice of giving the residual surplus after appropriation to the reserve fund.
In early 2014, the RBI appointed a committee headed by Y H Malegam to look into the issue of surplus transfer to the Government. The committee, which submitted its recommendations only recently, said the contingency and asset development reserves are at adequate level and RBI - for the next three years, starting from this fiscal - should transfer its entire surplus earned in the previous accounting year, to the Government.
After three years, once the RBI balance sheet grows, again a part of the surplus could be allocated for the reserve funds. It was reasoned that the Government should need the fund now which is facing high fiscal deficit that’s needed to be brought down.
