Forex gains help India’s central bank record increase in net income

MUMBAI (Reuters) – The Reserve Bank of India (RBI) earned 2.35 trillion rupees ($28.4 billion) in net income for the fiscal 2023 on higher forex gains, up from 1.6 trillion rupees in the previous year, its annual report released on Tuesday showed.

During the year, the central bank saw a gain of 1.03 trillion rupees from foreign exchange transactions, which allowed it to increase the size of its contingency fund, the report showed.

The RBI’s balance sheet size increased by 2.5% during in the financial year to 63.45 trillion rupees, from 61.90 trillion rupees in FY22, following which it transferred a surplus of 874.16 billion rupees to the government.

The central bank also transferred 1.3 trillion rupees to its contingency risk buffer, raising the size of this buffer to 6% of its balance sheet from 5.5% previously.

In the fiscal 2019, the RBI adopted a new Economic Capital Framework, which requires it to maintain a contingency risk buffer of 5.5%-6.5% of its balance sheet.

The new framework also allows the central bank to benchmark sales of foreign exchange to its historical average cost of acquiring those reserves, allowing it to realise gains on foreign exchange transactions during the year.

In contrast to the forex gains, the central bank booked a loss of 17 billion rupees on the sale and redemption of foreign securities, likely due to the rise in yields in developed markets like the U.S. The RBI holds these securities as part of its reserves.

The RBI booked a loss of 90.68 billion rupees while conducting operations under its Liquidity Adjustment Facility, while it paid an interest of 74.45 billion rupees for absorbing money through the Standing Deposit Facility window that was launched in April 2022, allowing the banks to park excess funds with the central bank beyond a certain limit and earn interest.

Economic outlook

Slowing global growth, protracted geopolitical tensions and a possible upsurge in financial market volatility following new stress events in the global financial system could pose downside risks to growth, the RBI said.

“It is important, therefore, to sustain structural reforms to improve India’s medium-term growth potential,” it said in the report, adding that the outlook for the domestic services sector “remains positive in FY24″.

On inflation, the RBI said risks have moderated as global commodity and food prices cooled. “Geopolitical dynamics and possible weather disturbances overcast the outlook for inflation in India,” it added.

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