RBI Annual Report | FY22 provisions jump over 5 times on rise in global interest rates

The Reserve Bank of India (RBI) made a provision of Rs 1.15 lakh crore towards its Contingency Fund in FY22. This is more than five times what it had provided in FY21, according to the central bank's annual report for the last financial year.

The annual report, released on May 27, showed the provision led to a 9.3 percent increase in the balance in the RBI's Contingency Fund to Rs 3.11 lakh crore as on March 31. In FY21, the RBI had made a provision of Rs 20,710 crore.

The RBI Contingency Fund is meant for meeting unexpected and unforeseen contingencies, including depreciation in the value of securities, risks arising out of monetary and exchange rate policy operations, and systemic risks.

The RBI had to provide a far larger amount in FY22 as its investments in foreign securities took a hit due to an increase in interest rates globally.

The RBI's holdings of foreign securities, which form a part of India's foreign exchange reserves, are marked-to-market. As such, any any unrealised gains or losses must be transferred to what is called 'Investment Revaluation Account-Foreign Securities'.

As at the end of FY22, the balance in the RBI's Investment Revaluation Account-Foreign Securities had fallen to -Rs 94,250 crore because of "increase in yields across the maturities for all major markets", the RBI said in its annual report.

The price of a security, for instance a US government bond, falls as the yield on it rises.

To ensure the Investment Revaluation Account-Foreign Securities was balanced at the end of FY22, the RBI had to charge an equal amount, or Rs 94,250 crore, to the contingency fund. This was responsible for much of the increase in the provisions made to the contingency fund.

The massive provision made in FY22 was also responsible for a slump in the dividend transferred by the RBI to the Centre for FY22.