RBI’s accounting policies lack transparency, burdening taxpayers

It is unusual that the RBI does not disclose gross earnings in its income statement but instead transfers part of its earnings directly to other accounts, presenting only net earnings. This approach is contrary to commonly accepted accounting standards. While the RBI requires banks to maintain proper accounting practices and adhere to accounting norms, it does not seem to follow internationally accepted accounting standards in its own income and expenditure statement.

According to the RBI's accounting policy, Foreign Securities (FS) and Rupee Securities (RS) are marked to market daily, with unrealised gains accounted in the IRA-FS and IRA-RS respectively. The mark-to-market balance at year-end is deducted from the Contingency Fund (CF), but this adjustment is reversed on the first working day of the next accounting year. This practice is non-standard and fails to provide a complete picture, calling for urgent improvement.

Inadequate transparency under accounting heads

The RBI also maintains large reserves under two different account heads. The first is the Currency and Gold Revaluation Account (CGRA), which accounts for currency movements, interest rate risk, and fluctuations in gold prices. Unrealised rupee gains and losses on FCA and gold, post mark-to-market, are not included in the income account but are posted to the CGRA. Due to ongoing depreciation of the rupee against the dollar and rising market prices of gold, both of which are initially recorded at cost, cumulative unrealised rupee gains have been credited to the CGRA. As of March 31, 2024, the CGRA had a balance of ₹11,30,793 crore. This would have further increased in the year ending March 31, 2025, given the rupee’s depreciation and the significant rise in gold prices.

The RBI has a policy of maintaining appropriate capital to manage risk. The Bimal Jalan Committee, constituted for this purpose, recommended maintaining a Contingency Fund (CF) between 5.5% and 6.5% of total Balance Sheet Assets (BSA) at year-end, with allocations drawn from annual surpluses.

As of March 31, 2024, the CF stood at ₹4,58,495 crore, which is 6.5% of the BSA of ₹70,47,703 crore. The committee also recommended maintaining economic capital between 20.8 and 25.4% of the BSA. As of March 31, 2024, the RBI’s economic capital, which includes the Contingency Fund, Reserve Fund, Asset Development Fund, and CGRA, was ₹15,89,059 crore or 22.43% of BSA. This serves as the RBI’s equivalent of equity capital to absorb risk.

However, a closer look at the RBI's accounting policies reveals that while the economic capital is calculated using the mark-to-market value of investment assets, the associated risk is based on the historic rupee cost of those assets. On the asset side of the balance sheet, foreign currency securities and gold are carried at mark-to-market value. The difference between cost and mark-to-market price is captured in the CGRA under current liabilities. However, disclosing this under Current Liabilities is conceptually wrong as this is no liability but a Reserve and needs to be shown under Reserves. Accounting heads need to be changed for greater transparency and merely stating that it is based on some schedule in the RBI Act must not be condoned.

RBI’s holding excess reserves, which cuts into transferable surplus

Risk only materialises when market prices fall below cost. But the RBI calculates reserves based on the mark-to-market value of its assets rather than their cost, resulting in higher-than-necessary reserves. If we deduct the CGRA balance of ₹11,30,793 crore as of March 31, 2024 from the total BSA of ₹70,47,703 crore, the economic capital of ₹15,89,059 crore rises to 26.86%, which exceeds the RBI’s own recommended policy range. This suggests that the RBI has taken an overly conservative approach to risk management and lacks transparency in how it implements its policies. It withholds surpluses belonging to the government, instead allocating to its own reserves. In contrast, the United States Federal Reserve transfers its entire annual surplus/deficit to the government without allocating to additional reserves.

In the previous year, we estimate that an additional ₹86,207 crore was reserved unnecessarily. This figure is derived from the 1.46% difference between the actual and recommended upper band (26.86% minus 25.4%) of the BSA net of CGRA. The RBI calculates economic capital based on the gross asset base rather than netting out CGRA. For greater transparency, the RBI must adjust its accounting practices to reflect net assets and avoid overstating reserves. The IRA-FS and IRA-RS should be set off against the CGRA rather than reducing the CF. The CGRA should fully reflect the net year-end movement in foreign currency assets and securities held on the balance sheet. The CF should only consist of actual surpluses, without adjustments related to movement in foreign assets or investments.

If the IRA-FS and IRA-RS amounts previously debited to the CF were instead adjusted to the CGRA, the CF would stand at ₹6,08,406 crore or 10.28% of BSA net of CGRA. This would represent a healthy level of risk capital. The CGRA would then reduce to ₹9,80,652 crore after subtracting the IRA-FS and IRA-RS. This is transparent and better accounting. RBI must hold a percent of Capital on Risk Weighted Assets on the same basis it enforces on its regulated entities.

In short, the RBI needs to simplify its accounting, improve disclosure, and promote transparency in its financial reporting. To improve transparency, the RBI should consider the following measures:

* Account for its full earnings on average FCA directly in the income statement

* Set off IRA accounts against CGRA at year-end to reflect the true increase in rupee value of overseas and Indian assets, and gold. A rupee appreciation would lead to a reduction in CGRA

* Allocate surpluses to the CF only when necessary and avoid adjusting the CF using IRA movements.

* Calculate economic capital, including the CF, based on BSA net of CGRA. If required, a higher ratio could be maintained transparently.

It is crucial to understand that the RBI is wholly owned by the sovereign, the Government of India. All risks on the RBI balance sheet ultimately fall on the government. Similarly, all surpluses apart from those clearly defined as contingency provisions should be transferred to GoI. The surplus is the result of its privilege as banker to the sovereign and the seigniorage it earns on its currency management on behalf of the government. The sovereign should not be denied its rightful surpluses because of opaque accounting practices at the RBI. Holding excessive reserves and failing to transfer surpluses compels the government to borrow more from the market, thereby imposing an unnecessary burden on taxpayers through interest payments on additional borrowing.